LIBRARY 

OF    THE 

UNIVERSITY  OF  CALIFORNIA. 
Class 


LECTURES 


ON    THE 


THEORY  OF  ECONOMICS 


BY 


FREDERICK  CHARLES  HICKS 

SINTON   PROFESSOR  OF  ECONOMICS  AND    CIVICS 
UNIVERSITY  OF  CINCINNATI 


Cincinnati 

THE  UNIVERSITY  OF  CINCINNATI  PRESS 
1901 


COPYRIGHT,  1901, 
BY  FREDERICK  CHARGES  HICKS 


Cincinnati 

Roessler  Brothers,  Printers 
114-116  W.  Sixth  St. 


-Co 
tbe  memory?  of  n\v  JBrotber 

<3Ubert  Menr\?  Mfcfcs 


CONTENTS 


PART  I     PROLEGOMENA 


1    ECONOMICS 

PAGB 

1.  Definition        ........  8 

2.  Economic  Activity 4 

3.  Purpose  of  Economic  Science      ....  5 

4.  Theory  and  Practice 7 

5.  Economics  and  Selfishness 11 

6.  Social  Sciences 13 

7.  History  and  Statistics 14 

8.  Scientific  Character  of  Economics   .         .         .  16 

2    FUNDAMENTAL  CONCEPTS 

9.  Economic  Want 19 

10.  Definition  of  Wealth 20 

11.  Conditions  Essential  to  Wealth    ....  21 

12.  Physical  Properties 23 

13.  Appropriability 23 

14.  Money  and  Wealth 24 

15.  Definition  of  Value       ......  26 

16.  Power-in-Exchange    ......  26 

17.  Scarcity 27 

18.  Definition  of  Price 29 

19.  The  Process  of  Measuring 30 

20.  Measuring  Value        ......  32 

21.  Two-fold  Result  of  Measurements  of  Value        .  35 

vii 


viii  CONTENTS 

3    THE  LAW  OF  VAI,UE 

PAGE 

22.  Basis  of  Value 86 

23.  Conditions  Determining  Value     ....  37 

24.  Variations  in  Value  ......  41 

25.  The  Law  of  Value 42 

26.  Variations  in  Price    ......  44 

27.  Standard  Measure  of  Value          ....  47 

28.  Test  of  Variations  of   Value     ....  61 

4    THE  ECONOMIC  PROCESS 

29.  Definition  of  the  Process 53 

30.  Social  and  Individual  Character  of  Activity    .  54 

31.  Normal  Economic  Activity  .....  66 

32.  Nature  of   Competition  and  Monopolization  .  57 

33.  Persistence  of  and  I/imitations  to   Competition 

and  Monopolization    .....  60 

34.  Conditions  of  Economic  Progress        ...  64 

35.  Services  Rendered  by  Competition  and  Monopo- 

lization    .         .         .         .         .         .         .         .66 

86.     Steps  in  the  Economic  Process        ...  68 


PART  II     PRODUCTION 


1    PRODUCTION 

37.  The  Production  of  Wealth 73 

38.  Productive  and    Unproductive  Expenditures  of 

Energy 76 

39.  Laws  of  Diminishing  and  of  Increasing  Returns        77 

40.  Conditions  of  Efficiency  in   the  Production  of 

Supply 81 

41.  Conditions  of  Efficiency  in  the   Production   of 

Demand  82 


CONTENTS  ix 

2  THE  FACTORS  OF  PRODUCTION 

PAGE 

42.  Situation 86 

43.  Efficiency  of  Situation 87 

44.  Material,  Capital 89 

45.  Efficiency  of   Capital 91 

46.  Labor 94 

47.  Efficiency  of  Labor 95 

48.  Enterprise 98 

49.  Efficiency  of  Enterprise 99 

50.  Cooperation    of  all    the   Factors   Necessary    to 

the  Production  of  Wealth          ...  101 

3  THE  ECONOMIC  ORGANIZATION 

51.  The  Economic  Organization         ....  105 

52.  Division  of  Function 107 

53.  Unification  of  Design 110 

54.  Development  of  Organization  .         .         .         .  112 

55.  New  Industries  Made  Possible    ....  114 

56.  Higher  Grade  of  Productive  Agencies  Developed  115 

57.  Existing  Agencies  More  Economically   Utilized  116 

58.  Danger  of  Excessive  Dependence    .         ,         .  120 

59.  Possibility  of  Overproduction       .         .         .         .122 

4    THE  INCENTIVE  TO  ACTIVITY 

60.  The  Incentive  to  Activity  and   Production         .  125 

61.  Individual  Character 126 

62.  Rights 127 

63.  Private  Property  Rights 128 

64.  Limitations  to  Private  Property  Rights      .         .  133 

65.  Right  to  Contract 136 

66.  Limited  Liability 140 

5    THE  DEVELOPMENT  OF  DEMAND 

67.  Population 144 

68.  Development  of  Wants 145 


x  CONTENTS 

PAGE 

69.  Persistence  of  Wants 149 

70.  Expansibility  of  Wants 151 

71.  Healthf ulness  of  Wants                                            .  154 

72.  Order  of  Development  of  Wants      .         .         .  155 

73.  Knowledge  of  the  Existence  and  Character  of 

Commodities        .         .         .         .         .         .  156 

74.  Prospect  of  Success   in  the   Effort  to   Secure 

Commodities  159 


PART  III     DISTRIBUTION 

1    DISTRIBUTION 

75.  The  Distribution   of  Wealth         .         .         .         .165 

76.  Expansibility  and  Exclusiveness  of  Wants    .         166 

77.  The  System  of  Distribution  Subject  to   Change     168 

2    THE  BASIS  OF  DISTRIBUTION 

78.  Fundamental    Characteristic    of    a    System    of 

Distribution 172 

79.  Test  of  the  Sufficiency  of  a  Basis  of   Distribu- 

tion           174 

80.  The  Basis  of  Equality 174 

81.  The  Basis  of  Need        .         .         .         .         .         .176 

82.  The  Basis  of  Contribution  to  Production         .         181 

83.  The  Basis  of  Value  of  Services   .         .         .         .184 

3    EXCHANGE 

84.  Relation  of  Exchange  to  the  Economic  Process     185 

85.  Conditions  Essential  to  an   Exchange        .         .     187 

86.  Medium  of  Exchange  and  Credit    ...         188 

87.  Agreement  as  to  the  Rate  of  Exchange     .         .191 

88.  Relation  of  the  Terms  of  an  Exchange  to  Dis- 

tribution           192 

89.  Extension  of  Sales    .  194 


CONTENTS  xi 

PAGE 

90.  Increase  of  Price 197 

91.  Law  of  Price 201 

92.  Relation  of  Competition  and  Monopolization  to 

Each  Other          .         .         .         .         .         .  201 

93.  Effect  of  Movements  in  Price  upon  Distribution  204 

94.  Introduction   of  a   Medium  of  Exchange   and 

of  a  Standard   Measure   of  Value         .         .  206 

4    THE  SHARES  IN  DISTRIBUTION 

95.  The  Shares  in  Distribution  .         .         .         .209 

96.  The  Fund  to  be  Distributed    ....  210 

97.  Principles  Determining  the  Shares     .         .         .  212 

98.  Minimum  and  Maximum  Limits  to  the  Shares  216 

99.  Effect  of  Variations  in  the  Shares  Upon   Each 

Other 217 

100.  Relation   of   Competition   and    Monopolization 

to  Each  Other    .  ' 219 

101.  Effect  of  the  Introduction  of  a  Medium  of  Ex- 

change and  of  a  Standard  Measure  of  Value  220 

5    RENT 

102.  Summary  of  the  Principles  of  Distribution    as 

Applied  to  Rent 224 

103.  Nature  of  Rent 225 

104.  Monopolization  and  Competition  in  Relation  to 

Rent 229 

105.  Minimum  Limit  to  Rent 231 

106.  The  Ricardian  Doctrine  of  Rent   .         .         .         .232 

107.  Criticism  of  the  Ricardian  Doctrine  of  Rent    .  235 

108.  Rent  and  the  Prices  of  General  Commodities       .  238 

109.  The  Unearned  Increment          ....  241 

6    INTEREST 

110.  Summary   of  the  Principles  of  Distribution  as 

Applied  to  Interest 242 


xii  CONTENTS 

PAGE 

111.  Nature  of  Interest 243 

112.  Variations  in  Interest  Returns       ....  246 

113.  Minimum  and  Maximum  Limits  to  Interest    .  249 

114.  Money  and  Interest 251 

7  PROFITS 

115.  Summary  of  the   Principles  of  Distribution  as 

Applied  to  Profits 257 

116.  Some  Features  of  the  Working  of  the  Principles 

of  Distribution  in  the  Case  of  Profits     .         .  258 

117.  The  Rent  Theoiy  of  Profits       ....  262 

118.  Criticism  of  the  Rent  Theory  of  Profits        .         .  264 

119.  Profits  and  the  Prices  of  General  Commodities  266 

120.  Excessive  Profits 268 

8  WAGES 

121.  Summary   of  the  Principles  of  Distribution  as 

Applied  to  Wages 271 

122.  Commercial  and  Economic  Wages     .         .         .  272 

123.  Susceptibility  of  Labor  to  Competition          .         .  274 

124.  The  Residual  Claimant  Theory  of  Wages          .  276 

125.  Criticism  of  the   Residual  Claimant  Theory  of 

Wages          .......  278 

126.  Relation  of  Wages  to  Past  and  Future  Product     .  281 

127.  Relation  Between  the  Variations  in  the  Wages  of 

Different  Laborers 283 

128.  Wages  and  Variations  in  General  Prices       .         .  284 


PART  I 
PROLEGOMENA 


CORRIGENDA. 

P.  216,  1.  18,  for  induce  the  owner  thereof  to  allow 
the  use  of  his  factor,  read  defray  the  expense  of 
making  the  corresponding  factor  available.  Sim- 
ilar substitutions  should  be  made  on  p.  223,  1.  6; 
p.  225,  1.  1  ;  p.  243,  1.3;  p.  258,  1.  2  ;  and  p. 
271,  1.  11. 

P.  233,  1.  23,  for  track  read  tract. 

P.  260,  1.  9,  for  situation  is  sufficient  to  induce  the 
possessor  of  enterprise,  read  enterprise  is  sufficient 
to  induce  the  possessor  thereof. 


ECONOMICS 


1.  The  science  of  economics  grew  out  of  the  at- 
tempt to  formulate  precepts  for  the  guidance  of  the 
State  in  its  relation  to  business,  a  fact  reflected  in 
the  name  "political  economy,"  which  has  so  long 
been  used  to  designate  the  subject.  It  was  found 
that  the  formulation  of  such  precepts  requires  a 
knowledge  of  the  wider  field  of  general  business 
activity.  Accordingly,  the  domain  of  the  economist 
came  to  be  considered  co-extensive  with  the  entire 
range  of  business  operations;  and,  since  in  business 
men  seek  wealth,  the  science  was  defined  as  "that 

Keynes,  The  Scope  and  Method  of  Political  Economy; 
Cairnes,  The  Character  and  Logical  Method  of  Political 
Economy,  2d.  ed.,  lectuies  i-vi.  ;  Cossa,  An  Introduction 
to  the  Study  of  Political  Economy,  trans,  by  Louis  Dyer, 
Theoretical  Part ;  Walker,  Political  Economy,  3d.  ed.,  Part 
I.  ;  Hadley,  Economics,  chap.  i.  ;  Pantaleoni,  Pure  Econom- 
ics, trans,  by  T.  B.  Bruce,  Part  I,  chap.  i.  ;  Marshall,  Prin- 
ciples of  Economics^  2d.  ed.,  Vol.  I.,  Bk.  1.  ;  Gide,  Political 
Economy,  trans,  by  B.  P.  Jacobsen,  pp.  1-14 ;  Ely,  Outlines 
of  Economics,  Bk.  I.,  chapters  x.,  xi.;  Roscher,  Principles  of 
Political  Economy,  trans,  by  John  J.  Lalor,  Vol.  I.,  H  11-21. 


4  THEORY  OF  ECONOMICS 

body  of  knowledge  which  relates  to  wealth. Ml  But 
there  is  something  even  more  fundamental  to  eco- 
nomics than  wealth.  Back  of  wealth,  which  is  the 
immediate  object  of  man's  efforts,  are  th<e  efforts 
themselves  and  the  purpose  for  which  they  are  put 
forth,  i.  e.,  the  satisfaction  of  wants.  Here  is  the 
fundamental  fact  in  economics.  Man  is  a  creature 
of  wants,  which  lead  him  to  act  that  he  may 
satisfy  them.  This  should  form  the  starting-point 
in  the  consideration  of  the  phenomena  that  are 
commonly  designated  industrial  or  economic.  It  is 
the  function  of  the  economist  to  investigate  the 
process  through  which  men  seek  to  secure  the  satis- 
faction of  their  wants,  to  the  end  that  the  principles 
involved  may  be  discovered  and  explained.  Econom- 
ics, then,  may  be  defined  as  the  science  that  treats 
of  human  activity  in  its  relation  to  the  pursuit  of 
the  satisfaction  of  wants. 

2.  In  this  view  of  the  nature  of  economics,  the 
scope  of  the  subject  embraces  all  human  activity, 
for  every  act  has  a  want-satisfying  phase,  i.  e. ,  every 
act  is  concerned  with  the  process  of  satisfying 
wants,  for  every  act  has  a  want  as  its  immediate 
cause.  It  is  true  that  in  some  acts  the  want- 
satisfying  phase  is  more  apparent  than  in  others, 
and  those  t^at  show  their  economic  character  most 
prominently  are  usually  selected  as  the  material  for 
investigation,  for  from  such  acts  the  principles  of 
the  economic  process  may  most  readily  and  certainly 

Francis  A.  Walker,  Political  Economy,  3d  ed.,  p.  8. 


ECONOMICS  5 

be  discovered.  Thus  the  activity  of  the  carpenter, 
the  farmer,  the  merchant,  the  manufacturer  and 
others  engaged  in  similar  pursuits,  is  manifestly 
directed  to  the  satisfaction  of  wants.  No  one  ques- 
tions that  such  activity  is  economic,  and  it  is  with 
activity  of  this  sort  that  economic  investigation  is 
chiefly  concerned. 

It  is,  however,  a  mistake  to  suppose  that  only 
such  acts  as  those  mentioned  possess  an  economic 
character.  The  activity  of  the  philanthropist,  the 
clergyman,  the  sister  of  mercy  and  others  of  like 
occupation,  has  an  economic  character  as  truly,  if 
not  as  apparently,  as  the  activity  of  the  carpenter, 
the  farmer,  the  merchant  or  the  manufacturer,  for 
the  activity  of  the  former  callings  proceeds  from 
wants  whose  satisfaction  is  sought,  as  truly  as  does 
that  of  the  latter.  There  may  be,  and  doubtless 
are,  wide  differences  between  the  two  sorts  of  ac- 
tivity, but  these  differences  lie,  not  in  the  fact  that 
one  is  economic  and  the  other  is  not,  but  rather  in 
the  character  of  the  wants  that  give  rise  to  the 
activity. 

3.  The  purpose  of  economic  science,  then,  is  to 
interpret  the  general  truths  of  human  activity  in 
its  relation  to  the  pursuit  of  want-satisfaction.  As 
such,  it  is  not  directly  and  immediately  concerned 
with  the  formulation  of  precepts  or  rules  of  con- 
duct. This  should  be  clearly  understood.  Other- 
wise the  proper  limits  of  the  subject  will  not  be 
recognized,  and  the  true  relation  of  economics  to 
the  problems  of  society  will  not  be  appreciated. 


6  THEORY  OF  ECONOMICS 

Injury  has  often  resulted  to  the  science  and  also  to 
the  cause  of  social  advancement  through  failure  to 
understand  just  what  is  to  be  expected  of  the  sub- 
ject. Two  facts  need  emphasis  in  this  connection: 
(1)  since  economic  theory  is  concerned  with  the 
principles  that  control  in  one  of  the  most  important 
phases  of  human  activity,  its  conclusions,  when 
valid,  are  indispensable  to  the  solution  of  social 
problems  ;  (2)  on  the  other  hand,  since  economic 
theory  treats  of  but  one  of  the  phases  of  human  ac- 
tivity, it  does  not  alone  suffice  for  the  solution  of 
those  problems. 

The  attempt  to  prescribe  for  social  ills  without  a 
knowledge  of  economic  principles  resembles  the  at- 
tempt of  a  physician  to  cure  disease  without  a 
knowledge  of  the  principles  of  materia  medica  or  of 
some  other  branch  of  the  science  of  medicine.  By 
chance,  he  may  apply  the  proper  remedy,  but  the 
probability  is  that  he  will  not,  and  that,  if  recov- 
ery follows  his  treatment,  it  will  be  due  to  the  fact 
that  the  patient's  constitution  is  able  to  withstand 
both  the  disease  and  the  medicine.  The  much 
heralded  panaceas  for  physical  ills  have  their  coun- 
terpart in  many  of  the  remedies  proposed  for  social 
ills.  Still,  the  presence  of  quacks  does  not  discredit 
the  real  science  of  medicine  in  the  opinion  of 
thoughtful  people,  nor  should  the  existence  of  social 
quacks  discredit  the  essential  truths  of  economics 
and  the  other  social  sciences  or  discourage  the 
search  for  those  truths. 

But,  however  important  economic  principles  may 
be,  since  their  scope  does  not  include  all  phases  of 


ECONOMICS  7 

human  activity,  they  constitute  but  part  of  the 
equipment  necessary  to. the  solution  of  social  prob- 
lems. In  addition  to  these,  such  equipment  re- 
quires a  knowledge  of  the  principles  of  moral  obli- 
gation and  of  the  nature  and  working  of  the  will  of 
society  through  the  state.  These  three,  economics, 
ethics  and  politics,  considered  as  subjects  which  are 
concerned  with  the  underlying  principles  of  human 
activity  in  their  respective  fields,  supply  the  essen- 
tial truths  upon  which  sound  social  policies  rest. 
The  policy  that  is  constructed  in  disregard  of  any 
one  of  them,  must  of  necessity  be  ill-balanced  and 
inadequate. 

4.  The  fact  that  economic  theory  is  necessary 
to  but  not  alone  sufficient  for  the  solution  of  social 
problems,  has  not  always  been  recognized  even  by 
economists  themselves.  Too  much  has  sometimes 
been  claimed  for  economic  theory,  and  when  the 
expectations  aroused  have  failed  of  realization, 
there  have  followed  criticism  and  even  denial  of  the 
value  of  the  science.  Two  of  these  criticisms  de- 
serve especial  notice.  Economics,  in  common  with 
other  subjects  whose  province  is  the  discovery  and 
interpretation  of  general  principles,  has  been  con- 
demned on  the  ground  of  a  supposed  fundamental 
inconsistency  between  theory  and  practice.  And, 
again,  the  theor}^  of  economics  has  been  subjected  to 
the  special  criticism  that  its  conclusions,  if  carried 
out,  would  be  destructive  of  the  welfare  of  society, 
since  they  disregard  man' s  higher  -nature  in  their 
emphasis  of  his  selfish  impulses. 


8  THEORY  OF  ECONOMICS 

So  far  as  the  charge  of  an  inconsistency  between 
theory  and  practice  is  concerned  in  general,  it  is 
sufficient  to  say  that  this  view  rests  upon  a  mis- 
taken conception  of  theory.  Where  such  inconsis- 
tency really  exists,  it  is  not  due  to  a  fundamental 
lack  of  harmony  between  theory  and  practice,  but 
to  the  shortcomings  of  the  particular  theory  in 
question.  Theory  is  nothing  more  than  the  interpre- 
tation of  practice.  There  can,  therefore,  be  no  real 
inconsistency  between  a  correct  theory  and  practice. 

But  of  this  criticism  as  urged  against  economic 
theory  in  particular,  something  more  needs  to  be 
said.  The  objection  in  this  connection  has  been 
directed  mainly  against  the  so-called  orthodox  or 
doctrinaire  economics  as  set  forth  by  the  English 
writers,  and  the  principal  occasion  for  the  criticism 
is  the  failure  of  the  doctrine  of  laissez-faire  or  non- 
interference by  government  in  business  affairs,  to 
meet  the  requirements  of  actual  life.  It  should  be 
said  in  passing  that  a  careful  reading  of  the  leading 
representatives  of  the  English  school  of  economists 
fails  to  reveal  any  such  hard  and  fast  advocacy  of 
laissez-faire  as  might  be  expected  from  the  state- 
ments of  some  of  their  critics.1  But,  admitting 
this,  it  remains  true,  doubtless,  that  some  among 
the  English  writers  show  a  tendency  to  restrict  un- 
duly the  sphere  of  governmental  activity  and  to 
overestimate  the  importance  of  governmental  non- 

1  Cf.  John  Stuart  Mill,  Principles  of  Political  Economy, 
Vol.  II.,  pp.  558,  et.  seq. 


ECONOMICS  9 

interference.  One  of  the  principal  reasons  for  this 
attitude  is  found  in  the  view  entertained  by  those 
writers  as  to  the  part  played  by  competition  in  the 
economic  process,  a  fact  that  illustrates  admirably 
the  dangers  of  building  theory  upon  inadequate  hy- 
potheses. 

Free  competition  is  probably  the  most  funda- 
mental of  the  hypotheses  upon  which  English  eco- 
nomic theory  rests.1  Nor,  indeed,  is  this  view 
limited  to  English  theory  alone.  In  the  prevailing 
treatment  of  the  subject,  the  existence  of  competi- 
tion that  is  "full  and  free"  is  repeatedly  set  forth 
as  a  necessary  condition  for  the  validity  of  the  con- 
clusions drawn.  It  is  not  surprising  that  such 
theory  should  prove  inadequate  as  an  interpretation 
of  actual  life. 

From  a  scientific  standpoint,  there  is  no  objection 
to  the  formulation  of  a  theory  of  human  activity  as 
it  would  be  under  a  regime  of  free  competition,  pro- 
vided, of  course,  the  reasoning  remains  consistent 
with  that  hypothesis.  But  a  serious  error  follows 
when,  without  further  qualification,  the  argument 
proceeds  as  though  that  which  was  assumed  for  the 
purpose  of  reasoning,  corresponds  with  what  exists 
in  a  normal  society.  This  is  exactly  what  much 

1  u Before  commencing  the  inquiry  into  the  laws  of  value 
and  price,  I  have  one  further  observation  to  make.  I  must 
give  warning,  once  for  all,  that  the  cases  I  contemplate  are 
those  in  which  values  and  prices  are  determined  by  compe- 
tition alone."— J.  S.  Mill,  Principles  of  Political  Economy, 
Vol.  i.,  p.  540. 


10  THEORY  OF  ECONOMICS 

of  the  current  economic  theory  does.  Starting  with 
free  competition  as  its  fundamental  hypothesis,  it 
soon  passes  to  the  assumption,  not  only  that  such  a 
condition  is  possible,  but  that  it  is  the  only  normal 
and,  therefore,  the  only  healthy  manifestation  of 
economic  activity.  It  is  but  a  step  from  this  con- 
clusion, to  the  inference  that  the  economic  ills  of 
society  are  to  be  remedied  by  procuring  the  univer- 
sal sway  of  free  competition,  an  opinion  which 
is  widely  prevalent.  Such  a  theory  is  wholly 
irreconcilable  with  practice,  for  a  condition  of 
absolutely  free  competition  does  not  and,  as  will 
be  shown  later,  by  the  very  nature  of  things  can- 
not exist.1 

It  is,  then,  doubtless  true  that  the  tenets  of  the 
English  economists  need  revision  in  the  light  of 
later  development  and  research.  Such  a  result  is 
entirely  in  accord  with  the  evolutionary  character 
of  society.  As  time  passes  new  conditions  appear 
which  call  for  interpretation  and  new  light  is  thrown 
upon  the  fundamental  principles  of  development 
themselves.  This,  however,  is  far  from  justifying 
the  tendency  that  is  shown  by  some  to  discard  alto- 

1The  criticism  here  made  receives  additional  emphasis 
when,  as  not  infrequently  happens,  even  those  who  profess 
to  rest  their  theory  upon  free  competition,  as  a  matter  of 
fact  do  not,  but  proceed  to  limit  the  sway  of  competition 
arbitrarily  as  occasion  requires.  Moreover,  in  view  of  the 
important  place  given  to  competition  in  economic  theory,  it 
is  a  significant  fact  that  one  will  search  in  vain  in  the  vari- 
ous expositions  of  competitive  economics  for  a  comprehen- 
sive description  of  what  free  competition  really  involves. 


ECONOMICS  11 

gether  the  conclusions  of  English  economics,  and 
to  construct  the  science  anew.  The  attempt  to  do 
so  has  failed  to  produce  anything  of  lasting  value. 
A  wiser  course  is  to  reexamine  the  hypotheses  upon 
which  that  body  of  doctrine  rests,  with  a  view  to  a 
restatement  of  its  principles  where  necessary.  It 
may  safely  be  affirmed  that  the  teachings  of  Adam 
Smith,  David  Ricardo  and  John  Stuart  Mill  supply, 
in  the  main,  the  foundation  upon  which  any  perma- 
ment  addition  to  economic  science  will  rest. 

5.  The  criticism  passed  upon  economic  theory 
that  it  inculcates  selfishness,  may  be  traced  in  part, 
at  least,  to  the  treatment  of  the  economic  process 
as  though  it  were  a  distinct  and  wholly  independent 
part  of  life.  For,  if  a  portion  of  men's  acts  are 
purely  economic,  it  would  seem  to  follow  that,  in 
directing  such  acts,  only  economic  principles,  z.  e. , 
such  as  are  concerned  immediately  with  want-satis- 
faction, need  be  considered.  Here,  too,  it  must  be 
admitted  there  is  much  in  the  attitude  of  economists 
to  warrant  such  a  conclusion.  When  to  this  is 
added  a  narrow  interpretation  of  want-satisfaction, 
which  conceives  it  to  be  wholly  selfish,  the  "dismal 
science' '  view  of  economics  appears  to  be  established. 
This  criticism  has  exerted  a  marked  influence  upon 
the  recent  trend  of  economic  thought,  including 
much  that  is  professedly  concerned  with  funda- 
mental principles  only.  The  attempt  has  been  made 
to  meet  the  difficulty  by  discarding  the  orthodox 
economics  and  substituting  therefor  a  new  system 
leavened  with  a  modicum  of  ethics.  Such  a  course 


12  THEORY  OF  ECONOMICS 

is  apt  to  result  in  poor  ethics  and  poorer  economics. 
A  remedy  of  that  sort  is  inadequate,  because  it  does 
not  touch  the  fundamental  difficulty.  It  is  the  criti- 
cism that  is  here  at  fault;  it  fails  to  recognize  the 
true  scope  and  purpose  of  the  science  of  economics. 

Economics,  as  a  science,  is  concerned  with  what 
is,  not  with  what  ought  to  be.  These  are  distinct 
inquiries.  The  question  of  ought  arises  as  soon  as 
the  attempt  is  made  to  formulate  a  policy  for  so- 
ciety or  for  individuals  in  society.  To  be  sure,  the 
determination  of  what  ought  to  be  done  to  promote 
human  welfare  is  the  ultimate  end  of  all  serious 
study  of  social  conditions.  But  the  question  of 
ought  can  not  be  determined  satisfactorily  without 
a  knowledge  of  what  is.  This  economics  aims  to 
ascertain  in  so  far  as  the  want-satisfying  phase  of 
activity  is  concerned.  But  the  process  of  attaining 
want-satisfaction  is  not  a  separate  and  distinct 
sphere  of  life.  Acts  can  not  be  sorted  into  distinct 
classes  on  the  basis  of  their  economic  or  non- 
economic  character.  As  has  been  pointed  out, 
economics  treats  of  a  phase  of  activity.  It  should 
not  be  difficult  to  recognize  that  the  search  for  the 
principles  which  actually  prevail  in  the  effort  of  men 
to  satisfy  their  wants,  is  far  from  identical  with 
teaching  that  men  ought  to  be  concerned  with  their 
own  welfare  alone. 

Furthermore,  the  fact  that  every  act  arises  from 
a  want  whose  satisfaction  it  seeks,  does  not  brand 
all  action  as  selfish  in  the  ordinary  meaning  of  that 
term.  Whether  an  act  is  selfish  or  not  depends 


ECONOMICS  13 

upon  the  kind  of  want  that  is  back  of  it  and  the  way 
in  which  its  satisfaction  is  sought.  Want-satisfac- 
tion is  not  necessarily  selfish.  Nor  does  the  fact 
that  economics  considers  action  regardless  of  its 
selfish  or  unselfish  character,  signify  that  the 
science  approves  as  right,  conduct  that  is  immoral. 
The  man  who  takes  advantage  of  another  in  a  busi- 
ness transaction  and  then  attempts  to  justify  the 
proceeding  on  the  ground  that  it  is  ( 'business,"  has 
but  a  distorted  notion  of  the  relation  of  business 
and  ethics.  The  science  of  physics  is  not  con- 
demned as  immoral  because  in  accordance  with 
physical  laws,  a  man  falling  from  the  tenth  story 
of  a  building  upon  a  stone  pavement  is  killed,  nor 
is  the  science  of  chemistry  held  responsible  for  the 
aid  that  the  would-be  murderer  derives  from  the 
chemical  properties  of  arsenic.  In  following  his 
good  impulses  and  his  evil  impulses,  man  seeks  the 
satisfaction  of  his  wants ;  so  far  as  the  science  of 
economics  is  concerned,  its  scope  is  limited  to  an  in- 
vestigation of  the  general  principles  involved  therein. 
6.  Economics  is  a  social  science  because  it  is  con- 
cerned with  human  activity  and  human  activity  is 
social.  Though,  under  some  circumstances,  men's 
acts  may  seem  to  be  purely  individual,  a  closer  view 
shows  that  they  are  never  devoid  of  social  character. 
Man  himself  is  by  nature  social  and  cannot,  if  he 
will,  escape  the  consequences  of  that  fact.  Hence, 
all  of  his  activity  is  social  activity  in  the  sense  that 
it  is  conditioned  by  society  and  that  it  in  turn  exerts 
an  influence  upon  society. 


14  THEORY  OF  ECONOMICS 

As  a  social  science,  economics  is  closely  related 
to  certain  other  subjects  which  treat  of  social  phe- 
nomena. First  among  the  social  sciences  is  soci- 
ology, which,  as  defined  by  Professor  Giddings, 
is  "the  science  of  social  elements  and  first  prin- 
ciples."1 Following  this  is  a  group  of  subjects 
whose  common  starting-point  is  man's  activity  as  a 
member  of  society.  Fundamental  in  this  group  are 
the  three  subjects  already  referred  to:  economics, 
ethics  and  politics,  treating  respectively  of  activity 
in  its  relation  to  want -satisfaction,  of  moral  obliga- 
tions and  of  the  nature  and  manifestation  of  the 
social  will  through  the  state.  In  a  manner  grow- 
ing out  of  these  are  other  related  subjects,  such  as 
jurisprudence,  which  treats  of  the  social  will  as 
manifested  in  law;  finance,  the  theory  of  the  sup- 
port of  the  state;  administration,  which  investigates 
the  methods  of  carrying  out  the  will  of  the  state; 
and  others. 

7.  With  the  subjects  mentioned,  two  others, 
history  and  statistics,  are  often  correlated.  The 
domain  of  history  is  most  comprehensive.  In  its 
broadest  sense,  it  is  nothing  less  than  the  record  of 
the  past.  Restricted  to  society,  it  is  the  record  of 
human  development  in  all  its  phases.  The  philos- 
ophy of  history  is  the  theory  of  the  progress  of 
society.  No  investigation  that  seeks  to  understand 
the  present  condition  of  society  and  to  provide  for 
its  future  can  be  adequate  if  it  disregards  the  facts 

1  The  Principles  of  Sociology,  p.  33. 


ECONOMICS  15 

of  social  evolution.  It  is  preeminently  the  province 
of  history  to  interpret  the  development  through 
which  society  has  attained  its  present  condition. 

Formerly  there  was  a  tendency  to  limit  the  scope 
of  history  to  the  political  phase  of  social  growth, 
but  the  view  that  "history  is  past  politics  and  pol- 
itics present  history"  can  be  accepted,  if  at  all,  only 
in  a  very  general  sense.  For  as  the  truths  of  evo- 
lution have  broadened  the  conception  of  human 
progress,  it  has  come  to  be  recognized  that  history 
belongs  not  to  one  phase  of  that  development  alone 
but  to  all  phases.  And  from  constituting  a  single 
and  restricted  field  of  investigation,  history  has 
come  to  be  regarded  as  an  essential  feature  of  every 
department  of  social  science. 

The  science  of  statistics  has  grown  out  of  a 
need  for  better  methods  of  investigation.  Theories 
based  upon  hypotheses  evolved  from  the  limited 
experience  of  one  or  of  a  few  individuals  have 
proven  inadequate.  The  recognition  of  this  fact 
led  to  a  movement  for  the  collection  and  systemati- 
zation  of  data  on  a  large  scale,  and  out  of  this  has 
developed  a  new  subject,  statistics,  which  is  essen- 
tially a  science  of  method  of  investigation.  It  is 
described  by  Professor  Meitzen  as  "the  method  of 
judging  of  collective  phenomena  from  the  results 
of  enumeration."1 

1  The  History,  Theory  and  Technique  of  Statistics,  trans, 
by  Roland  P.  Falkner.  Supplement  to  the  Annals  of  the 
American  Academy  of  Political  and  Social  Science,  May 
1891,  p.  107. 


16  THEORY  OF  ECONOMICS 

8.  Varying  opinions  are  entertained  as  to  the 
validity  of  the  claim  of  economics  to  be  considered 
a  science.  The  controversy  is  of  importance  only 
as  it  may  help  to  give  a  clear  understanding  of  the 
nature  of  the  subject.  The  differences  of  opinion 
result  largely  from  different  views  as  to  what  con- 
stitutes a  science.  If  the  distinguishing  character- 
istic of  a  science  lies  in  the  absolute  and  fixed  nature 
of  the  phenomena  with  which  it  deals,  economics 
is  not  a  science.  According  to  this  standard,  more- 
over, no  subject  that  treats  of  man,  whether  con- 
cerned with  his  physical  or  mental  nature,  is  a 
science.  Indeed,  this  standard  would  exclude  from 
the  list  of  sciences  all  subjects  'that  deal  with  life 
in  any  of  its  manifestations,  including  botany  and 
zoology. 

A  second  criterion  that  may  be  taken  for  judging 
whether  a  subject  is  entitled  to  be  called  a  science 
is  the  exact  character  of  the  results  obtained.  Ac- 
cording to  this  standard,  also,  economics  is  not  a 
science.  But  if  absolute  exactness  be  insisted 
upon,  it  is  doubtful  whether  any  subject  except 
mathematics  can  be  called  a  science.  Chemistry, 
physics  and  all  subjects  that  involve  measurement 
have  their  "probable  error." 

A  third  feature  that  may  be  regarded  as  distin- 
guishing a  science  is  the  character  of  the  subject  as 
explaining  homogeneous  phenomena  by  the  inter- 
pretation of  their  general  truths.  It  is  upon  this 
basis  that  most  of  the  so-called  sciences  rest  their 
title  to  be  thus  designated.  And  according  to  this 


ECONOMICS  17 

standard,  economics  is  properly  included  among  the 
sciences. 

But  whether,  in  the  last  analysis,  economics  is 
considered  to  be  a  science  or  not,  scientific  methods 
are  indispensable  to  the  discovery  and  interpreta- 
tion of  the  general  truths  in  the  phenomena  with 
which  the  subject  deals.  Discriminating  definitions 
are  eminently  desirable  and  logical  consistency  is 
essential.  Much  of  the  objection  to  the  recognition 
of  economics  as  a  science  is  due,  not  to  the  nature 
of  its  phenomena,  but  to  the  unscientific  methods 
of  its  exponents.  And  whether  the  attainment  of 
exact  results  is  possible  or  not,  nothing  can  justify 
the  failure  to  seek  the  highest  degree  of  exactness 
that  can  be  obtained. 


FUNDAMENTAL   CONCEPTS 


Fundamental  to  the  science  of  economics  are 
four  concepts,  designated  respectively,  want,  wealth, 
value  and  price.  For  the  discussion  of  the  prin- 
ciples of  economics,  it  is  especially  desirable,  at  the 
outset,  to  formulate  clear  definitions  of  these  con- 
cepts. Adequate  definitions  are  indispensable  to 
any  scientific  discussion,  but  their  importance  in 
economics  is  enhanced  by  the  fact  that  the  terms 

Clark,  Philosophy  of  Wealth,  chapters  i.,  v.;  The  Dis- 
tribution of  Wealth^  chapter  xxiv.;  Pantaleoni,  Pure  Eco- 
nomics, trans.,  Part  I.,  chapters  ii.-v.,  Part  II.,  chapter 
i.,  H  1,  2;  Von  Wieser,  Natural  Value,  trans,  by  C.  A. 
Malloch,  Books  I.,  II.;  Walker,  Political  Economy,  \\  4-15, 
114-118;  Bohm-Bawerk,  The  Positive  Theory  of  Capital, 
trans,  by  William  Smart,  Bk.  III.,  chapters  i.,  ii.;  Marshall, 
Principles  of  Economics,  Bk.  II.,  chapter  ii. ;  Mill,  Principles 
of  Political  Economy,  Preliminary  Remarks,  Bk.  III.,  chap- 
ters i.,  xv.;  Sidgwick,  The  Principles  of  Political  Economy, 
Bk.  I.,  chapters  ii.,  iii.;  Gide,  Political  Economy,  trans., 
Bk.  I.;  Roscher,  Political  Economy,  trans.,  $$  1-10,  100; 
"Ely,  Outlines  of  Economics,  pp.  89-93,  119-126,  141;  Jevons, 
The  Theory  of  Political  Economy,  pp.  40-90;  Laughlin, 
Elements  of  Political  Economy,  chapters  i.,  vii. 

18 


FUNDAMENTAL    CONCEPTS  19 

here  employed  are  in  common  use  without  the  care- 
ful distinctions  essential  to  scientific  analysis. 

9.  An  economic  want  is  a  desire  that  leads  to 
activity.  As  has  already  been  pointed  out,  the 
fundamental  fact  in  economics  is  that  every  man  is 
a  creature  of  wants  whose  satisfaction  he  seeks.  A 
man  is  hungry  and  wants  food ;  he  is  cold  and 
wants  clothing  and  shelter  ;  he  possesses  the  capac- 
ity for  knowing  and  wants  instruction ;  he  appre- 
ciates the  beautiful  and  wants  paintings  and  statu- 
ary ;  he  is  religious  and  wants  the  facilities  for 
worship.  Indeed  the  scope  of  this  economic  phe- 
nomenon is  as  broad  and  comprehensive  as  human 
activity  itself.  And  since  economics  is  the  theory 
of  human  activity  in  its  relation  to  want-satisfac- 
tion, wants,  economically  considered,  are  not  limited 
to  desires  for  material  things,  nor  are  the  so-called 
ethical  or  philanthropic  desires  excluded.  But 
these  and  all  others  that  influence  activity  are  prop- 
erly classed  among  economic  phenomena. 

In  considering  the  relation  of  wants  to  activity, 
it  is  necessary  to  distinguish  between  general  wants, 
which  are  more  or  less  intense  but  indefinite  long- 
ings for  things  that  may  or  may  not  exist,  such  as 
a  general  want  for  food ,  clothing  or  pictures ;  and 
specific  wants,  which  are  directed  towards  particu- 
lar objects,  such  as  a  want  for  definite  articles  of 
food,  clothing  or  pictures  that  actually  exist.  The 
importance  of  this  distinction  lies  especially  in  the 
close  relation  sustained  by  specific  wants  to  wealth 
and  value. 


20  THEORY  OF  ECONOMICS 

10.  In  the  effort  to  attain  the  satisfaction  of 
wants,  specific  things  become  the  objects  of  wants. 
Thus,  in  seeking  to  satisfy  hunger,  commodities 
such  as  wheat,  apples,  sheep  and  others  become 
wanted.  These  things  constitute  wealth,  which 
consists  of  whatever  exists  and  is  the  object  of  a 
want.  When  a  thing  becomes  the  object  of  a 
want,  it  may  be  said  to  possess  the  power  of  want- 
attraction,  by  which  is  meant  merely  that  the 
thing  attracts  to  itself  a  human  want.  Wealth, 
then,  may  be  defined  to  consist  of  whatever  pos- 
sesses the  power  of  want- attraction.1  Broad  as 
this  definition  may  seem,  it  is  not  essentially  differ- 
ent from  the  popular  conception  of  wealth.  Houses 
and  lands,  wheat  and  corn,  cattle  and  sheep,  pictures 
and  statuary, — whatever  in  business  intercourse  is 
considered  to  be  wealth,  owes  its  designation  as 
such  to  the  fact  that  it  is  wanted.  Some  things 
that  are  wanted,  it  is  true,  are  commonly  excluded 
from  the  category  of  wealth.  But  when  the  reasons 

1  Every  one  who  has  discussed  this  subject  has  felt  the 
need  of  a  satisfactory  term  by  which  to  designate  that  which 
constitutes  the  distinguishing  characteristic  of  __  wealth. 
Though  the  idea  itself  is  not  difficult  to  comprehend,  it 
is  difficult  to  describe  in  a  few  words.  The  term  "utility," 
commonly  employed,  results  in  confusion,  because  there  is 
associated  with  it  in  the  popular  mind  certain  ideas,  such  as 
beneficial,  that  are  not  necessarily  connected  with  wealth. 
The  expression,  "power  of  want-attraction,"  is  by  no  means 
free  from  objection,  but  its  use  in  explaining  the  subject  to 
students  has  shown  that  it  conveys  the  desired  information 
even  though  it  is  somewhat  cumbersome. 


FUNDAMENTAL   CONCEPTS  21 

for  such  exclusion  are  ascertained,  they  are  found 
to  lie  in  the  exigencies  of  the  practical  conduct  of 
affairs;  they  are  not  valid  for  scientific  purposes. 
Thus  the  popular  view  excludes  from  wealth  those 
things  whose  power  to  attract  wants  is  so  small  as 
to  be  "practically  nothing."  This  suits  the  require- 
ments of  business,  but  it  does  not  suffice  for  eco- 
nomic science.  As,  in  seeking  mathematical  truths, 
the  infinitesimal  can  not  be  ignored,  so,  in  seeking 
economic  truths,  the  indefinitely  small  must  not  be 
discarded  arbitrarily. 

11.  For  the  existence  of  want-attracting  power, 
and,  therefore,  of  wealth,  two  conditions  are  essen- 
tial: (1)  there  must  exist  a  want,  and  (2)  there 
must  exist  something  that  is  the  object  of  that 
want. 

Supply  or  the  mere  existence  of  commodities  is 
not  of  itself  sufficient  to  result  in  power  of  want- 
attraction,  for  that  power  is  not  something  that 
might  exist  if  wants  existed;  it  is  something  that 
actually  does  exist.  A  thing  is  not  wealth  simply 
because  it  might  be  wanted.  For  example,  at  one 
time  cotton-seed,  with  the  exception  of  the  com- 
paratively small  amount  that  was  required  for  plant- 
ing, possessed  no  power  to  attract  wants.  Indeed, 
its  presence  diminished  that  power,  because  it  was 
a  hindrance  to  the  utilization  of  the  fiber.  The 
necessity  of  separating  it  from  the  fiber  and  of  dis- 
posing of  it  involved  additional  expense.  But 
to-day  this  is  changed,  and  the  power  of  cotton- 
seed to  attract  wants  is  great.  Why?  Not  be- 


22  THEORY  OF  ECONOMICS 

cause  cotton-seed  has  changed  in  its  physical 
character,  but  because  wants  for  it  have  developed. 
Cotton-seed  oil  and  cotton-seed  cake  are  in  great 
demand. 

On  the  other  hand,  it  is  equally  true  that  a  want 
alone  is  not  sufficient  for  the  existence  of  want- 
attracting  power.  A  want  is  merely  an  abstraction 
until  it  is  directed  toward  some  object.  Men  want 
food,  but  that  does  not  signify  that  the  power  of 
want-attraction  exists.  The  lonely  wanderer  in  the 
desert  on  the  verge  of  starvation  wants  food  most 
intensely,  but  if  there  is  no  food,  his  want  does  not 
result  in  the  existence  of  want-attracting  power. 
True,  a  general  want  may  lead  to  activity  for  its 
satisfaction  and  thereby  occasion  the  production  of 
a  supply  possessing  want-attracting  power,  but  this 
power  actually  exists  only  when  the  want  and  the 
thing  come  into  relation  with  each  other.  It  is  not 
want  for  something  in  general,  but  want  for  some 
specific  commodity  that  results  in  the  power  of  want- 
attraction,  and,  therefore,  in  wealth. 

Furthermore,  it  should  be  observed  in  this  con- 
nection, both  that  want  for  some  specific  commodity 
is  necessary  to  the  existence  of  wealth  and  that 
when  want  for  some  specific  commodity  exists, 
there  is  wealth.  It  may  be  that  after  the  thing 
that  was  wanted  is  obtained  and  its  true  character 
ascertained,  the  want  for  it  will  cease.  Then  its 
power  to  attract  want  ceases,  and  with  it  its  charac- 
ter as  wealth.  In  other  words,  the  possession  of 
want- attracting  power  by  any  thing  does  not  involve 


FUNDAMENTAL   CONCEPTS  23 

the  actual  usefulness  of  the  thing  for  the  purpose 
for  which  it  is  wanted.  Whether  ultimately  adapted 
to  one's  needs  or  not,  the  fact  that  a  thing  exists 
and  is  wanted,  is  sufficient  that  for  the  time  being 
want-attracting  power,  and,  therefore,  wealth 
should  exist. 

12.  The  power  of  want-attraction   must  not  be 
identified  with  physical  properties,  though  its  exist- 
ence may,  in  a  sense,  be  due  to  such  properties, 
z*.  e. ,  it  may  be  because  of  its  physical  properties 
that  a  thing  is  wanted.     But  the  power  of  want- 
attraction  is  not  a  physical  property.     Woolen  gar- 
ments  are  able  to  give  warmth,   and  possess  the 
power  to  attract  wants  where  warmth  is  desired. 
But  this  power  to  attract  wants  is  not  the  physical 
property  of  the  garment.      If  it  were,   the  want- 
attracting  power  of  the  woolen  garment  would  re- 
main the  same  so  long  as  its  physical  character  re- 
mained unchanged.     But  it  is  evident  that  this  is 
not   the   case,   for  the  power  of   woolen  garments 
to  attract  wants  is  greater  in  cold  than  in  warm 
climates;  to  those  who  know  their  capacity  to  warm 
than  among  those  who  are  ignorant  of  it. 

It  follows,  too,  from  the  nature  of  wealth,  that  it 
is  not  limited  to  tangible  things.  It  includes  the 
music  of  the  singer  as  well  as  the  piano  of  the 
manufacturer,  for  the  former  as  well  as  the  latter 
may  possess  the  power  of  attracting  wants. 

13.  It  is  sometimes  said  that  for  a  thing  to  be 
wealth  it  must  be  appropriable.     It  is  undoubtedly 
true  that  if   a  thing  is  to   continue  to   constitute 


24  THEORY  OF  ECONOMICS 

wealth  it  must  be  appropriable,  in  that  it  must  be 
capable  of  serving  the  purpose  for  which  it  is 
wanted.  Otherwise  it  will  cease  to  be  wanted  and 
in  that  event  it  ceases  to  be  wealth.  Thus  a  sunken 
ship  may  be  wanted  until  it  is  found  that  it  can  not 
be  raised,  after  which  there  may  be  no  want  for  it 
in  the  economic  sense,  i.  e.y  no  want  that  leads  to 
activity,  in  which  case  it  ceases  to  be  wealth.  But 
appropri ability,  as  the  term  is  commonly  employed, 
is  a  characteristic  or  property  rather  than  of  wealth. 
Property  involves  ownership  and  implies  the  ability 
of  the  thing  to  be  appropriated  by  an  owner.  It  is 
a  legal  concept.  A  thing  may  be  wealth,  because 
the  object  of  a  want,  even  though  legal  ownership 
in  it  is  impossible. 

14.  The  association  of  the  ideas  of  wealth  and 
property  led  to  the  view,  at  one  time  prevalent, 
that  wealth  consists  chiefly  in  money,  i.  <?.,  in  an 
instrument  which  enables  its  possessor  to  obtain 
property  in  commodities.  But  the  wealth  of  society 
is  not  necessarily  increased  by  an  increase  in 
money,  nor  by  an  increase  in  such  things  as  bonds, 
mortgages  and  other  similar  instruments  of  ex- 
change and  evidences  of  ownership.  For  it  is 
evident  that  if  every  individual  in  society  were  to 
execute  to  another  individual  a  mortgage,  the 
wealth  of  society  would  not  be  increased  by  the 
amount  of  these  mortgages.  And,  if  the  govern- 
ment were  to  start  its  printing  presses  and  turn 
out  an  unlimited  quantity  of  paper  money  in 
denominations  of  dollars,  the  wealth  of  the  country 


FUNDAMENTAL    CONCEPTS  25 

would  not  be  increased  by  that  number  of  dollars, 
each  having  the  present  value  of  a  dollar.  The 
reason  for  this  lies  in  the  fact  that  there  would 
be  little  or  no  want  for  such  mortgages  and  such 
dollars. 

The  recognition  of  the  fact  that  the  mere  increase 
in  money,  mortgages  and  similar  commodities  does 
not  necessarily  increase  the  wealth  of  society,  has 
led  to  another  view  which  goes  to  the  opposite  ex- 
treme and  denies  to  these  the  character  of  wealth. 
There  is  here  a  failure  to  distinguish  between  the 
existence  of  wealth  and  the  amount  of  wealth.  It 
does  not  follow  that,  because  under  certain  condi- 
tions an  increase  in  instruments  of  exchange  and 
evidences  of  ownership  does  not  increase  the  wealth 
of  society,  these  things  never  constitute  wealth.  If 
society  were  to  proceed  to  make  its  entire  supply  of 
iron  into  saws,  the  wealth  of  society  would  not  be 
increased  proportionately.  Indeed,  it  is  quite  con- 
ceivable that  a  point  would  be  reached  where  an 
increase  in  saws  would  actually  decrease  the  supply 
of  wealth,  the  number  being  so  far  in  excess  of  the 
want  therefor  that  the  saws  would  be  worth  less 
than  the  raw  materials  used  in  making  them.  Saws 
are  wealth  only  in  so  far  as  they  possess  the  power 
to  attract  wants.  In  like  manner,  in  so  far  as 
money  and  mortgages  possess  the  power  to  attract 
wants,  they  are  as  truly  wealth  as  the  tool  which, 
by  facilitating  the  cultivation  of  the  soil,  assists  in 
the  production  of  food,  or  the  machine  which,  by 
sawing  lumber,  increases  the  power  of  wood  to 


26  THEORY  OF  ECONOMICS 

attract  wants.  A  society  without  instruments  of 
exchange  would  have  less  wealth  than  a  society 
which  possessed  them. 

15.  In  investigating  the  process  of  pursuing  the 
satisfaction  of  wants,  it  becomes  necessary  to  deter- 
mine  quantitative  conditions.     This   gives  rise  to 
questions  of  value,  for  value  is  the  amount  of  the 
power  of  want-attraction  possessed  by  any  commod- 
ity.    Value  is  the  quantity  of  that  characteristic 
which  constitutes  a  thing  wealth.     Wealth,  power 
of  want-attraction  and  value  are  related  as  thing, 
characteristic  and  amount  of  that  characteristic,  so 
that  value  is  inseparable  from  wealth  and  wealth  is 
inseparable  from  value. 

16.  Many  wants  are  common   to  more  than  one 
member  of  society,  from  which  it  follows  that  the 
objects  of  wants  are  often  sought  by  different  indi- 
viduals.    Moreover,  wants  differ  in  degree  of  in- 
tensity.    Two  persons  may  possess  commodities  of 
such  a  character  that  each  will  prefer   what   the 
other  has  to  that  which  he  himself  has.     In  such 
an  event,  the  two  persons  will  probably  exchange 
their  commodities,   for,   other  things  being  equal, 
every  man  seeks  that  which  has  for  him  the  great- 
est power  of  want-attraction.     Hence,   many  com- 
modities have  what  is  called   "power-in-exchange," 
i.  e. ,  they  have  the  power  to  secure  for  their  posses- 
sor other  commodities  in  exhange  for  them.     But 
"power-in-exchange"  is  not  essential  to  value  ;  that 
is  to  say,  it  is  not  necessary  that  two  persons  should 
want  a  commodity-  in  order  that  value  should  exist. 


FUNDAMENTAL   CONCEPTS  27 

A  thing  does  not  cease  to  have  value,  simply  be- 
cause it  comes  into  the  possession  of  the  only  per- 
son that  wants  it  and  thereby  ceases  to  have 
"power-in-exchange,"  for  it  does  not  cease  to  have 
value  so  long  as  it  has  the  power  to  attract  a  want. 
On  the  contrary,  it  is  want-attracting  power  which 
gives  "power-in-exchange,"  for  all  things  that  pos- 
sess "power-in-exchange"  have  want-attracting 
power,  as  is  evidenced  by  the  mere  fact  of  exchange, 
which  implies  that  the  thing  exchanged  is  wanted. 
Value,  then,  does  not  depend  upon  "power-in-ex- 
change," but  "power-in-exchange"  depends  upon 
value. 

17.  Some  things  are  commonly  said  to  have  a 
large  amount  of  power  to  attract  wants  but  no 
value,  because,  though  of  great  usefulness,  they 
are  so  plentiful.  Thus,  air,  light,  water  and  other 
commodities  of  like  character  are  said  to  possess  no 
value  .(except  under  special  circumstances  when 
they  may  be  scarce  and  difficult  to  obtain)  though 
their  power  to  attract  wants  is  very  great.  Ac- 
cordingly, it  is  held  that  scarcity  is  essential  to 
value.  But  scarcity  is  a  purely  relative  matter  and 
influences  the  degree  of  want-attracting  power  pos- 
sessed by  a  commodity,  not  the  existence  of  that 
power.  A  thing  may  have  more  or  less  value  be- 
cause it  is  more  or  less  scarce,  but  the  existence  of 
value  depends  upon  the  existence  of  want-attracting 
power,  not  upon  scarcity. 

To  say  that  water  has  no  value  though  its  want- 
attracting  power  is  great,  involves,  from  an  eco- 


28  THEORY  OF  ECONOMICS 

nomic  standpoint,  two  errors.  In  the  first  place,  it 
misconceives  what  the  power  of  want- attraction 
really  is.  When  water  is  said  to  have  a  large 
amount  of  power  to  attract  wants,  it  is  meant  that 
water  is  very  beneficial.  But  want-attracting  power 
and  power  to  benefit  are  not  identical,  unless  it  be 
held  that  a  man  is  benefited  by  whatever  will  at- 
tract his  wants,  a  proposition  to  which  few  will 
agree.  A  thing  might  possess  much  want-attract- 
ing power  with  but  little  or  no  capacity  to  benefit, 
because  it  might  be  wanted  very  much  despite 
its  comparative  uselessness ;  and,  vice  versa,  a 
thing  might  possess  but  little  want-attracting 
power  with  much  capacity  to  benefit,  because, 
though  capable  of  doing  much  good,  little  want 
for  it  existed. 

Again,  when  it  is  said  that  water  has  much 
power  to  attact  wants,  the  supply  of  water  in 
general  is  thought  of,  and  when  it  is  said  that  water 
has  no  value,  a  small  portion  of  the  supply  is 
thought  of.  There  is  here  a  'confusion  of  general 
and  specific  wants.  In  the  case  of  any  given  amount 
of  water,  as  for  example  a  given  cupful,  its  value 
may  be  very  small,  but  its  want- attracting  power  is 
also,  in  that  case,  very  small,  i.  e.,  the  want  for  that 
cupful  is  small. 

On  the  other  hand,  to  deny  that  value  exists  in 
such  a  case,  because  the  amount  is  insignificant  for 
practical  purposes,  leads  to  some  remarkable  con- 
clusions from  the  scientific  point  of  view.  Thus, 
according  to  that  theory,  a  grain  of  wheat  has  no 


FUNDAMENTAL    CONCEPTS  29 

value,  but  a  large  number  of  grains,  enough,  say, 
to  make  a  bushel,  have  value.  Yet  the  bushel  of 
wheat  is  only  the  sum  of  the  number  of  grains 
which  compose  it.  This  method  of  reasoning  finds 
something  by  adding  together  a  limited  number  of 
nothings  and  is  invalid  in  economics  as  well  as  in 
mathematics.  If  air,  light,  water  and  similar  com- 
modities possess  want-attracting  power,  they  must 
have  value,  because  value  is  merely  the  amount  of 
such  power  and  there  must  be  some  amount  where 
the  power  exists. 

18.  The  amount  of  want-attracting  power  pos- 
sessed by  a  commodity  at  any  time,  i.  <?.,  the  value 
of  the  commodity,  is  found  by  measuring  that 
value.  Value  when  measured  is  expressed  in  terms 
of  the  measure  or  unit  of  comparison,  and  this  ex- 
pression is  price.  Price,  then,  may  be  defined  as 
value  expressed  in  terms  of  a  measure.  Though 
there  is  nothing  abstruse  or  difficult  of  comprehen- 
sion about  the  nature  of  value  and  price  and  their 
relation  to  each  other,  no  other  concepts  in  eco- 
nomics are  more  often  misunderstood,  few  are  used 
with  so  little  attempt  at  accurate  distinction  and 
none  is  a  more  prolific  source  of  error.  Their  im- 
portance to  economic  discussion  rather  than  any  ex- 
ceptional difficulty  in  comprehending  them,  necessi- 
tates their  consideration  in  greater  detail. 

To  understand  price  and  to  appreciate  its  signifi- 
cance, one  must  understand  the  process  of  measur- 
ing value,  for  it  is  by  measuring  value  that  price  is 
found.  This,  in  turn,  requires  a  knowledge  (1)  of 


30  THEORY  OF  ECONOMICS 

X 

what  it  means  to  measure  and  (2)  of  what  it  is  that 
is  to  be  measured.1 

19.  To  measure  is  to  compare  quantities.  The 
operation  involves  the  selection  of  a  unit  or  measure 
and  the  comparison  of  the  thing  to  be  measured 
with  the  measure.  The  selection  of  a  measure2 
consists  in  choosing  a  definite  amount  of  some  spe- 
cific thing  possessing  the  quality  or  property  that  is 
to  be  measured.  This  selection  of  a  measure  is 
purely  a  matter  of  choice,  except  only  that  the 
thing  selected  must  possess  the  quality  or  property 
that  is  to  be  measured,  z".  e. ,  a  measure  of  length 
must  have  length,  a  measure  of  weight  must  have 
weight,  and  a  measure  of  value  must  have  value. 
Having  selected  a  measure,  the  remainder  of  the 
process  of  measuring  consists  in  determining  the 
quantitative  relation  between  the  measure  and  the 
thing  to  be  measured.  Take  for  example  the  process 
of  measuring  length.  As  a  first  step,  a  definite 
amount  of  something  having  length  is  selected  as  a 
unit  or  measure.  Convenience  will  dictate  that 
the  measure  be  neither  too  long  nor  too  short, 
but  all  that  can  be  said  to  be  absolutely  essential  to 

1  Measuring  value  is  one  of  the  most  common  phenomena 
in  the  economic  process.     Whenever  an  exchange  is  made 
or,  indeed,  whenever  one  thing  is  preferred  to  another,  value 
is  measured.     But  notwithstanding  the  frequency  of  the 
operation  and  its  importance,  it  is  one  of  the  least  compre- 
hended of  all  phases  of  economics,  and  misconceptions  con- 
cerning it  are  responsible  for  a  multitude  of  fallacies. 

2  The  popular  term  "measure"  is  employed  in  the  main  in 
this  discussion  instead  of  the  scientific  term  "unit." 


FUNDAMENTAL    CONCEPTS  31 

the  measure  is  that  it  should  have  length.  The 
amount  selected  is  purely  a  matter  of  choice.  To 
facilitate  measuring,  society  adopts  standards  for 
general  use,  which  are  designated  by  some  special 
name,  such  as,  in  the  case  of  measures  of  length,  a 
"foot,"  a  "yard,"  or  a  "metre."  But  the  measure 
used  in  any  instance  may  be  some  convenient 
length  adopted  for  the  occasion,  as  when  a  gar- 
dener, desiring  to  make  the  sides  of  a  bed  equal, 
takes  as  his  unit  or  measure  a  certain  distance  on 
his  hoe  handle.  Even  where  society  adopts  stand- 
ard measures,  it  remains  true  that  the  size  of  those 
measures  in  the  first  instance  was  purely  a  matter 
of  choice.  And  though  the  existence  of  such 
standards  may  be  eminently  desirable  for  social  in- 
tercourse, and  though  they  are  so  commonly  used 
that  one  seldom  thinks  of  their  having  been  selected 
arbitrarily,  still,  as  a  matter  of  fact,  they  are  in  no 
way  an  absolutely  indispensable  requisite  to  the 
process  of  measuring. 

Having  settled  upon  the  measure  of  length  to 
be  used,  a  comparison  is  made  between  it  and  the 
thing  to  be  measured  in  order  to  determine  the 
quantitative  relation  between  the  lengths  of  the  two 
objects.  The  result  of  the  comparison  is  a  ratio. 
It  is  found  that  the  length  of  the  thing  measured 
bears  a  certain  relation  to  the  length  of  the  meas- 
ure. Thus,  if  a  foot  is  the  measure,  and  the  re- 
sult shows  that  the  object  measured,  say  for  ex- 
ample a  board,  is  twenty  feet  long,  this  means  that 
the  length  of  the  board  is  twenty  times  the  length 
of  that  which  is  called  a  foot. 


32  THEORY  OF  ECONOMICS 

The  result  of  the  measurement  will  be  more  or 
less  precise,  according  to  the  invariabilty  of  the 
measure  and  the  care  exercised  in  making  the  com- 
parison. Thus  one  may  pace  a  field  to  determine 
its  length,  and  since  a  pace  is  subject  to  variation 
in  length,  the  result  will  give  but  an  approximately 
precise  idea  as  to  the  length  of  the  field.  Or,  in 
measuring  with  a  yard-stick,  the  operation  may  be 
carelessly  performed,  with  but  an  approximate  re- 
sult. Still,  these  comparisons  are  measurements 
regardless  of  their  precision.  To  measure  is  to  com- 
pare quantities,  and  all  quantitative  comparisons 
are  measurements. 

20.  The  second  requisite  for  an  understanding  of 
the  process  of  measuring  value  is  a  clear  compre- 
hension of  what  it  is  that  is  to  be  measured.  The 
nature  of  value  has  already  been  described,  but  its 
essential  characteristics  may  well  be  emphasized 
anew  in  this  connection.  The  value  of  a  commodity 
is  the  amount  of  its  power  to  attract  wants,  or,  if 
being  wanted  may  be  called  a  property  of  a  com- 
modity, the  value  of  a  commodity  is  the  amount  of 
its  property  of  being  wanted,  just  as  the  length  of 
anything  is  the  amount  of  its  property  of  extension. 
In  measuring  value,  a  comparison  is  instituted  be- 
tween two  commodities  to  determine  the  relative 
degrees  of  intensity  with  which  they  are  wanted, 
i.  e. ,  how  the  amount  of  the  want-attracting  power 
of  one  compares  with  the  amount  of  the  want- at- 
tracting power  of  the  other. 

To  illustrate,  suppose  it  is  desired  to  measure 
the  value  of  a  horse.  First,  something  possessing 


FUNDAMENTAL   CONCEPTS  33 

want-attracting  power  is  arbitrarily  selected  as  a 
unit  or  measure.  This  measure  may  be  anything 
having  value.  Some  things  are  more  convenient 
than  others  for  use  as  measures  of  value,  but  the 
possession  of  value,  i.  e.,  of  some  power  of  want- 
attraction,  is  the  only  absolutely  indispensable 
requisite  of  a  measure  of  value.  The  measure  se- 
lected in  this  instance  may  be  a  sheep.  A  compari- 
son is  then  made  between  the  want-attracting  power 
of  the  horse  and  of  the  sheep.  As  a  result,  it  may 
be  found  that  the  want  for  the  horse  equals  the 
want  for  50  sheep.  Then  the  value  of  the  horse 
has  been  measured  and  found  to  be  equal  to  the 
value  of  50  sheep.  Here,  then,  is  price.  The  price 
of  the  horse  is  50  sheep.  This  is  the  value  of  the 
horse  expressed  in  terms  of  the  measure,  sheep. 
Or,  the  measure  adopted  may  be  a  definite  quantity 
of  some  metal,  say  23.22  grains  of  gold.  A  com- 
parison may  show  that  the  want  for  the  horse 
equals  the  want  for  2,322  grains  of  gold.  The 
value  of  the  horse  then  equals  the  value  of  2,322 
grains  of  gold.  The  price  of  the  horse  is  2,322 
grains  of  gold.1 

1ln  ordinary  business  intercourse,  the  terms  "value"  and 
"price"  are  often  used  interchangeably,  as  when  one  asks, 
4 'what  is  the  value  of  a  horse"  or  "what  is  the  price  of  a 
horse,"  but  in  scientific  discussion  the  distinction  between 
the  two  concepts  should  be  carefully  observed.  Thus  in  the 
above  illustration,  it  would  commonly  be  said  that  the  value 
of  the  horse  is  2,322  grains  of  gold,  but  accurately  speaking, 
it  should  be  said  that  the  value  of  the  horse  is  equal  to  the 
value  of  2,322  grains  of  gold,  or  that  the  price  of  the  horse 
is  2,322  grains  of  gold. 


34  THE  OR  Y  OF  ECONOMICS 

As  in  the  case  of  length  and  weight  certain 
amounts  are  selected  as  measures  and  called  a  foot, 
a  pound,  etc.,  so  in  the  case  of  value,  that  which  is 
selected  as  a  unit  or  measure  may  be  designated  by 
some  special  name,  such  as  a  dollar,  a  pound  or  a 
franc.  Thus  the  measure  selected  may  be  23.22 
grains  of  gold  and  this  may  be  called  a  dollar. 
Then,  in  the  case  of  the  horse  above  mentioned,  it 
would  be  said  that  the  price  of  the  horse  is  100  dol- 
lars, but  this  is  only  another  way  of  saying  that 
the  want  for  the  horse  equals  the  want  for  100  of 
those  things  which  are  called  dollars. 

Nor  is  the  correctness  of  this  in  any  wise  affected 
by  the  fact  that  no  two  persons  may  agree  that  the 
value  of  the  horse  is  equal  to  the  value  of  fifty 
sheep  or  of  2,322  grains  of  gold  or  of  whatever 
may  be  taken  as  the  measure.  This  would  mean 
merely  that  in  no  two  persons  was  the  relative  in- 
tensity of  the  want  for  the  horse  and  for  the  sheep 
the  same.  .Herein  lies  the  chief  difference  between 
measuring  such  properties  as  length  and  weight 
and  measuring  value.  In  the  former,  the  property 
measured  is  constant  or  nearly  so;  in  the  latter,  it 
is  variable.  The  length  of  a  given  field  is  the  same 
at  all  times;  the  same  is  true  of  the  length  of  a 
given  foot.  But  the  value  of  a  horse  is  variable, 
and  so  also  is  the  value  of  whatever  may  be  selected 
as  the  measure  of  value.  This  fact  has  important 
consequences,  but  it  should  not  be  allowed  to  ob- 
scure the  fact  that  whether  length,  weight  or  value 
is  considered,  the  process  of  measuring  is  the  same, 


FUNDAMENTAL   CONCEPTS  35 

in  that  in  all  cases  measuring  is  comparing  amounts 
of  similar  qualities,  and  that  whenever  such  com- 
parisons are  made  they  are  measurements. 

21.  All  measurements  give  a  two-fold  result.  To 
compare  one  thing  with  another,  involves  comparing 
the  other  with  the  one.  Thus,  if  a  room  is  meas- 
ured and  found  to  be  twenty  feet  long,  it  follows 
that  a  foot  is  one- twentieth  the  length  of  the  room. 
So  in  the  case  of  the  horse,  if  its  value  equals  the 
value  of  fifty  sheep,  it  follows  that  the  value  of  a 
sheep  equals  one-fiftieth  the  value  of  the  horse. 
The  price  of  the  horse  is  fifty  sheep;  the  price  of  a 
sheep  is  one-fiftieth  of  the  horse.  Hence  two 
prices  result  from  all  measurements  of  value.  This 
fact  is  obscured  in  ordinary  business  transactions 
by  the  custom  of  selecting  definite  quantities  of  one 
or  more  commodities,  usually  metals,  as  standards 
by  which  to  measure  values,  and  the  designation  of 
these  measures  by  some  special  name  not  suggestive 
of  the  object  itself.  But  it  is  evident  that,  if  the 
measure  is  23.22  grains  of  gold,  called  a  dollar,  it 
follows  that  when  the  price  of  twenty  pounds  of 
sugar  is  a  dollar,  the  price  of  a  dollar,  or  of  23.22 
grains  of  gold,  is  twenty  pounds  of  sugar. 

Price,  then,  is  the  value  of  a  commodity  ex- 
pressed in  terms  of  some  other  commodity  with 
which  it  is  compared  to  determine  the  quantitative 
relation  of  the  values  of  the  two  commodities.  In 
other  words,  price  is  value  expressed  in  terms  of  a 
measure. 


THE  LAW  OF  VALUE 


22.  The  basis  of  value  is  power  of  want-attrac- 
tion. By  basis  of  value  is  meant  that  upon  which 
value  depends,  and  it  follows  from  the  concept  of 
value  set  forth  in  the  definition,  that  want-attract- 
ing power  is  the  basis  of  value.  But  it  is  necessary 
to  emphasize  this  fact  so  that  there  may  not  fail  a 
clear  distinction  between  the  true  basis  of  value 
and  certain  other  economic  phenomena,  which,  even 
when  indispensable  to  value,  are  not  in  themselves 
the  cause  of  value. 

It  is  sometimes  said  that  labor  is  the  basis  of 
value.  But  value  does  not  exist  merely  because 
labor  has  been  expended,  even  though  some  labor, 
if  only  that  of  appropriation,  is  necessary  to  the 

Walker,  Political  Economy,  H  119-128;  Ely,  Outlines  of 
Economics,  Bk.  II.,  Part  II.,  chapter  ii.;  Gide,  Political  Econ- 
omy, trans.,  pp.  47-68;  Clark,  Philosophy  of  Wealth,  chapter 
vi. ;  Laughlin,  Elements  of  Political  Economy,  chapter  x. ; 
Mill,  Principles  of  Political  Economy,  Bk.  III.,  chapters 
ii.-vi.;  V.  Wieser,  Natural  Value,  trans.,  Bks.  I.,  II.; 
Bohm-Bawerk,  Positive  Theory  of  Capital,  trans.,  Bk.  III.; 
Pantaleoni,  Pure  Economics,  trans.,  Part  II.,  chapter 
iii.;  Marshall,  Principles  of  Economics,  Bk.  III. 


THE  LAW  OF  VALUE  37 

existence  of  value.  Hence  the  amount  of  want- 
attracting  power  possessed  by  a  commodity  does 
not  correspond  to  the  amount  of  labor  that  has  been 
expended  upon  it,  nor  does  its  value  bear  any  neces- 
sary quantitative  relation  to  the  amount  of  labor 
expended.  Indeed,  labor  is  often  expended  with- 
out resulting  in  value  at  all,  because  no  one 
desires  that  which  is  produced  or  because  nothing 
is  produced. 

According  to  another  but  similar  view,  cost  of 
production  is  the  basis  of  value.  There  are  wide 
differences  of  opinion  as  to  what  is  meant  by  cost 
of  production.  But  it  is  not  the  basis  of  value  ac- 
cording to  any  of  the  views  entertained  as  to  its 
nature,  even  though  in  the  production  of  want- 
attracting  power  there  must  be  some  cost,  however 
slight.  The  objections  to  this  view  are  substantially 
the  same  as  those  in  the  case  of  the  labor  theory. 
Expenditure  of  energy  does  not  necessarily  result 
in  value.  If  the  product  is  not  wanted,  it  has  no 
value,  however  large  its  cost  may  have  been.  Hence 
value  does  not  depend  upon  the  cost  of  production, 
although  under  some  circumstances,  as  will  be  seen 
later,  the  two  may  sustain  an  important  relation  to 
each  other. 

23.  Value  results  from  the  want  for  a  specific 
commodity.  To  discover,  then,  the  principles  gov- 
erning value,  the  want-attracting  power  of  a  specific 
commodity  must  be  the  object  of  consideration. 
This  specific  commodity  constitutes  a  definite  por- 
tion of  the  supply  of  that  commodity,  and  may  be 


38  THEORY  OF  ECONOMICS 

designated  a  unit  of  supply.  The  conditions  de- 
termining the  want  for  a  unit  of  supply  are:  (1) 
the  intensity  of  the  demand  for  the  kind  of  com- 
modity in  general,  and  (2)  the  number  of  units  or 
the  supply  of  the  commodity.1 

That  the  intensity  of  the  demand  for  a  given 
kind  of  commodity  will  affect  the  want  for  a  unit 
of  the  supply  of  that  commodity  is  evident.  The 
want  for  a  unit  of  the  supply  of  bread,  say  a  loaf, 
will  differ  with  different  degrees  of  hunger  and 
with  different  degrees  of  liking  for  bread  as  an 
article  of  food.  A  loaf  of  bread,  if  sold  to  the  high- 
est of  several  bidders  having  equal  ability  to  pur- 
chase, would  be  shown  to  be  wanted  more  by  one 
of  the  number  who  was  starving  or  who  found 
bread  a  desirable  sort  of  food,  than  by  one  whose 
hunger  had  recently  been  satisfied  or  who  had  diffi- 
culty in  digesting  bread. 

But  the  want  for  a  specific  loaf  of  bread  will  be 
influenced  also  by  the  number  of  loaves  available, 
for  this  determines  the  ease  or  difficulty  with  which 
another  loaf  can  be  obtained.  And  the  more  easily 
another  can  be  secured,  the  less  intense  will  be  the 
desire  for  the  specific  loaf  in  question.  Though  a 

1  In  speaking  of  units  of  supply,  it  is  assumed  that  all  are 
of  the  same  quality.  So  far  as  economic  science  is  concerned, 
differences  in  quality  constitute  different  kinds  of  commod- 
ities. No.  2  wheat  is  a  different  kind  of  commodity  from 
No.  1  wheat  as  truly  as  corn  is  a  different  kind  of  commodity 
from  wheat,  though  the  degree  of  difference  between  the 
former  is  not  so  great  as  between  the  latter. 


THE  LAW  OF  VALUE  39 

man  were  so  hungry  that  he  would  give  a  dollar 
for  a  loaf  of  bread  rather  than  go  without  it,  the 
want- attracting  power  of  a  given  loaf  is  not  equal 
to  that  of  a  dollar,  if  the  supply  of  loaves  is  so 
abundant  that  another  can  be  secured  for  five  cents. 
The  want  for  a  given  unit  of  bread  is  not  large,  no 
matter  how  hungry  the  man  or  how  excellent  the 
bread,  if  another  loaf  can  easily  be  obtained. 

It  follows  then  that  the  greater  the  demand  with 
a  given  supply,  the  greater  is  the  want-attracting 
power  of  a  unit  of  that  supply,  and,  vice  versa,  the 
less  the  demand,  the  less  is  the  want- attracting 
power  of  a  unit.  And,  on  the  other  hand,  the 
greater  the  supply  of  a  commodity,  with  a  given 
demand,  the  less  is  the  want-attracting  power  of  a 
unit,  and,  vice  versa,  the  less  the  supply,  the  greater 
is  the  want-attracting  power  of  a  unit.  Value, 
then,  is  determined  by  the  relation  of  supply  and 
demand. 

The  supply  of  a  commodity  is  the  amount 
that  is  available  for  meeting  wants.  But  the  want 
for  a  commodity  may  be  due  to  a  desire  to  provide 
for  the  future,  and  the  intensity  of  the  want  for  an 
existing  unit  of  supply  may  be  influenced  by  the 
prospective  ease  or  difficulty  with  which  the  com- 
modity can  be  secured  in  the  future,  i.  e.,  the  value 
of  a  given  unit  of  supply  depends  in  part  upon 
prospective  supply.  Moreover,  not  all  portions  of 
the  supply  of  a  commodity  actually  in  existence 
exert  the  same  influence  upon  value.  That  which 
is  kept  out  of  the  market  in  anticipation  of  a  higher 


40  THEORY  OF  ECONOMICS 

price  does  not  influence  value  the  same  as  that 
which  is  offered  for  sale.  A  distinction  may,  there- 
fore, be  made  between  active  and  potential  supply, 
the  former  including  all  of  a  commodity  that  is  ac- 
tually available  at  a  given  time  and  the  latter,  that 
which  is  prospectively  available. 

A  similar  distinction  may  be  made  between  active 
and  potential  demand.  Some  wants,  though  satisfied 
at  times,  recur.  Moreover,  changes  in  conditions, 
such  as  a  decrease  in  prices,  may  lead  wants  that 
were  dormant  to  manifest  themselves.  The  wants 
that  actually  seek  satisfaction  under  given  condi- 
tions constitute  active  demand,  while  those  wants 
which  may  become  active  constitute  potential  de- 
mand. 

The  fact  that  the  active  supply  and  demand 
may  increase  and  decrease  because  of  changes  in 
price,  may  appear  to  contradict  the  statement  that 
value  depends  upon  the  relation  of  demand  and  sup- 
ply. A  decrease  in  price  may  result  in  the  with- 
drawal of  some  of  the  supply  or  in  the  addition  of 
some  demand  ;  while  an  increase  in  price  may  re- 
sult in  the  increase  of  supply  or  decrease  of  de- 
mand. From  this  it  appears  to  be  possible  that  de- 
mand and  supply  are  determined  by  value  through 
price,  instead  of  value  being  determined  by  demand 
and  supply.  The  contradiction  is,  however,  but 
apparent.  It  is  future  demand  and  supply  that  are 
influenced  by  movements  in  price.  The  value  at 
any  given  time  depends  upon  the  relation  then  ex- 
isting between  demand  and  supply. 


THE  LAW  OF  VALUE  41 

24.  From  the  fact  that  value  is  determined  by 
the  relation  of  demand  and  supply,  it  follows  that 
value  is  subject  to  variations  when  changes  occur 
in  that  relation.  A  change  in  the  relation  of  de- 
mand and  supply  occurs  whenever  there  is  a  change 
in  either  demand  or  supply  which  is  not  exactly 
offset  by  a  corresponding  change  in  the  other. 
Moreover,  changes  in  the  relation  of  demand  and 
supply  are  the  rule  rather  than  the  exception.  The 
supply  of  commodities  seldom,  if  ever,  remains  con- 
stant, and  even  though  it  did  for  a  time,  if  a  change 
occurred  in  wants,  this  would  change  the  relation 
of  demand  and  supply  and  result  in  a  variation  in 
value. 

It  will  be  observed,  also,  that  whenever  the 
change  in  the  relation  of  demand  and  supply  is  due 
to  an  increase  in  demand  or  to  a  decrease  in  supply, 
i.  e. ,  whenever  the  change  is  an  increase  in  relative 
demand  or  a  decrease  in  relative  supply,  the  value 
of  a  unit  increases.  And,  conversely,  whenever 
the  change  in  the  relation  of  demand  and  supply  is 
due  to  a  decrease  in  demand  or  to  an  increase  in 
supply,  i.  e. ,  whenever  the  change  is  a  decrease  in 
relative  demand  or  an  increase  in  relative  supply, 
the  value  of  a  unit  decreases.  That  is  to  say,  vari- 
ations in  value  move  in  the  same  direction  as  varia- 
tions in  demand  and  inversely  to  variations  in 
supply. 

This  statement  as  to  variations  in  value  per- 
tains to  the  value  of  units  of  supply  rather  than  to 
the  value  of  the  entire  supply.  As  to  what  effect 


42  THEORY  OF  ECONOMICS 

variations  in  supply  will  have  upon  the  value  of  the 
total  supply,  no  universal  principle  can  be  laid 
down  beyond  this  ;  whether  an  increase  or  a  de- 
crease in  the  number  of  available  units  of  supply 
will  cause  a  corresponding  or  a  converse  movement 
in  the  value  of  the  entire  supply,  depends  upon  the 
effect  of  the  variation  in  the  supply  upon  the  value 
of  a  unit.  An  increase  in  supply  might  so  far  de- 
crease the  value  of  a  unit  as  to  decrease  the  value 
of  the  total  supply  ;  on  the  other  hand,  a  decrease 
in  supply  might  increase  the  value  of  a  unit  to  such 
an  extent  as  actually  to  increase  the  value  of  the 
total  supply.  For  example,  an  increase  in  dia- 
monds, by  making  them  common,  might  so  decrease 
the  demand  as  to  diminish  the  value  of  the  total 
supply  of  diamonds,  while  a  decrease  in  their  sup- 
ply might  have  an  opposite  effect.  The  value  of 
the  total  supply  of  a  commodity  depends  upon  the 
value  of  a  unit  and  the  number  of  units. 

25.  The  principles  which  govern  in  the  deter- 
mination of  value  and  in  variations  in  value  are 
sometimes  combined  and  called  the  law  of  value, 
which  may  be  thus  stated:  Value  is  determined  by 
the  relation  of  demand  and  supply  and  varies  because 
of  variations  in  demand  or  supply,  moving  in  the 
same  direction  as  demand  and  inversely  as  supply. 
The  importance  of  this  law  to  the  interpretation  of 
economic  phenomena  and  to  the  formulation  of 
precepts  for  the  control  of  the  economic  affairs  of 
society  can  hardly  be  overestimated,  and  calls  for 
a  correct  understanding  of  its  exact  content. 


THE  LAW  OF  VALUE  43 

It  is  sometimes  inferred  that,  because  variations 
in  value  are  due  to  variations  in  supply  or  demand, 
there  is  a  definite  quantitive  relation  between 
changes  in  supply  or  in  demand  and  changes  in 
value.  According  to  this  view,  if  the  supply  of  a 
commodity  doubles  the  value  of  a  unit  of  the  supply 
decreases  one-half,  and  if  the  supply  of  a  com- 
modity decreases  one-half,  the  value  of  a  unit 
doubles.  Such  a  conclusion  is  false  and  is  in  no 
way  involved  in  the  law  of  value.  The  extent  to 
which  a  change  in  supply  will  affect  value  depends 
upon  the  status  of  the  want  for  the  commodity.  If 
before  the  change  in  supply,  nearly  all  the  want  for 
the  commodity  was  met,  a  given  increase  in  supply 
will  cause  a  relatively  large  decrease  in  the  value  of 
a  unit,  because  such  an  increase  in  supply  will 
enable  a  unit  of  the  supply  to  be  obtained  much 
more  readily.  On  the  other  hand,  if  an  increase  in 
supply  finds  a  large  unsatisfied  want  awaiting  it, 
the  result  of  such  an  increase  in  supply  will  be  a 
very  slight  fall  in  the  value  of  a  unit.  In  like  man- 
ner, a  decrease  in  supply  will  cause  a  large  or  small 
increase  in  value  according  to  the  accompanying 
status  of  the  want.  The  nature  of  the  want,  the 
availability  of  other  commodities  which  may  be 
substituted  for  the  one  in  question,  and  many  other 
conditions  enter  to  determine  to  what  extent  changes 
in  supply  will  affect  the  value.  Moreover,  varia- 
tions in  the  supplies  of  different  commodities  do 
not  necessarily  nor  probably  cause  the  same  degree 
of  variations  in  the  values  of  the  two  commodities. 


44  THEORY  OF  ECONOMICS 

The  attempt  to  formulate  a  statement  of  the  quanti- 
tive  relation  between  variations  in  supply  and  varia- 
tions in  value  can  not  succeed  so  long  as  the  phe- 
nomena of  human  wants  elude  the  efforts  to  discover 
in  them  uniformly  constant  tendencies. 

It  should  be  noted,  too,  in  this  connection,  that 
variations  in  the  annual  output  of  commodities  do 
not  indicate  the  extent  of  variations  in  the  supply 
of  commodities,  except  when  the  commodities  are 
of  such  a  character  that  each  year's  supply  is  con- 
sumed annually.  Thus  to  compare  changes  in  the 
supply  of  wheat  and  of  gold  by  comparing  the 
annual  output  of  these  commodities  involves  a  seri- 
ous error.  The  annual  product  of  gold,  silver  and 
other  similar  commodities  but  adds  to  a  supply 
that  is  already  large,  whereas  the  annual  product  of 
wheat,  potatoes  and  commodities  similar  to  these,  is 
approximately  a  renewal  of  the  supply. 

26.  Price  is  value  expressed  in  terms  of  a  meas- 
ure, hence  the  price  of  any  commodity  is  the  ratio 
of  its  want- attracting  power  to  the  want-attracting 
power  of  the  commodity  with  which  it  is  compared. 
It  follows,  then,  that  the  price  of  a  commodity  will 
fluctuate  with  changes  either  in  the  amount  of  its 
want-attracting  power,  i.  e.,  its  value,  or  in  the 
amount  of  the  want- attract  ing  power,  /.  e. ,  the 
value,  of  the  commodity  which  serves  as  a  measure. 
Thus  if  the  value  of  a  pound  of  sugar  is  equal  to 
the  value  of  one-half  a  yard  of  cloth,  the  price  of  a 
pound  of  sugar  is  one-half  a  yard  of  cloth.  Now, 
if  either  the  value  of  the  pound  of  sugar  changes, 


THE  LAW  OF   VALUE  45 

without  a  corresponding  change  in  the  value  of 
cloth,  or  the  value  of  a  yard  of  cloth  changes 
without  a  corresponding  change  in  the  value  of 
sugar,  there  results  a  change  in  the  price  of  sugar 
in  terms  of  cloth.  Suppose,  for  example,  that 
the  value  of  sugar  doubled,  the  value  of  cloth  re- 
maining the  same,  then  the  value  of  a  pound  of 
sugar  would  be  equal  to  the  value  of  a  yard  of 
cloth,  and  the  price  of  a  pound  of  sugar  would  be 
one  yard  of  cloth.  In  like  manner,  if  the  value  of 
cloth  increased,  say  to  double  its  former  amount, 
the  value  of  sugar  remaining  unchanged,  then  the 
value  of  a  pound  of  sugar  would  equal  the  value  of 
a  fourth  a  yard  of  cloth,  and  the  price  of  a  pound 
of  sugar  would  be  one-fourth  a  yard  of  cloth. 

But,  as  has  been  seen,  value  is  subject  to  varia- 
tions because  of  changes  either  in  the  supply  of 
a  commodity  or  in  the  demand  for  it.  Since,  then, 
the  price  of  a  commodity  is  dependent  upon  the  re- 
lation of  two  values,  each  of  which  is  subject  to 
variation  because  of  changes  in  supply  or  demand, 
it  follows  that  price  is  subject  to  variation  from  the 
four  following  causes  :  (1)  from  variations  in  the 
supply  of  the  commodity  itself  or  (2)  in  the  de- 
mand for  it,  or  (3)  from  variations  in  the  supply  of 
the  commodity  taken  as  a  measure,  or  (4)  in  the  de- 
mand for  that  commodity.  Thus  an  upward  move- 
ment in  the  price  of  a  commodity  will  result  from 
an  increase  in  the  demand  for  it,  or  from  a  decrease 
in  the  supply  of  it,  or  from  a  decrease  in  the  de- 
mand for  the  commodity  that  serves  as  a  measure, 


46  THEORY  OF  ECONOMICS 

or  from  an  increase  in  the  supply  of  that  com- 
modity. A  fall  in  price  will  result  from  any  one  of 
the  four  converse  changes  in  demand  and  supply. 

From  the  nature  of  price  and  its  relation  to  value, 
it  follows  also  that  a  movement  in  the  price  of  one 
commodity  involves  a  movement  in  the  price  of  the 
commodity  that  serves  as  a  measure,  and  that  these 
movements  are  in  opposite  directions.  Thus  an  up- 
ward movement  in  the  price  of  one  commodity  re- 
sults from  an  increase  in  the  ratio  of  its  value  to 
the  value  of  a  second  commodity,  with  which  the 
first  is  compared.  But  this  involves  a  decrease  in 
the  ratio  of  the  value  of  the  second  commodity  to 
the  first,  and,  therefore,  a  fall  in  the  price  of  the 
second  commodity  in  terms  of  the  first.  If  the 
price  of  sugar  in  terms  of  cotton  goes  up,  the  price 
of  cotton  in  terms  of  sugar  goes  down,  and  vice  versa. 

The  dependence  of  price  upon  the  supply  of 
and  demand  for  commodities  and  the  two-fold  na- 
ture of  price  fluctuations  are  often  unperceived  be- 
cause of  the  method  by  which  prices  are  fixed  in 
business  transactions.  For  prices  do  not  move  up 
and  down  like  mercury  in  a  thermometer  as  the 
result  of  physical  changes  and  exactly  coincident 
with  them.  Prices  are  fixed  through  the  medium 
of  human  judgment,  so  that  actual  changes  in  sup- 
ply and  demand  affect  values  and,  therefore,  prices, 
only  as  they  affect  the  judgments  of  men.  More- 
over, though  the  method  of  fixing  prices  consists 
at  times  in  the  bidding  by  purchasers,  who  offer 
more  or  less  according  to  their  judgment  as  to  the 


OF 

UNIVERSITY 


THE  LA  W  OF  VAL  UE  47 

conditions  of  supply  and  demand,  more  often  the 
method  employed  consists  in  offering  a  commodity 
at  a  price  fixed  by  the  seller,  who  increases  or  de- 
creases the  price  according  to  his  opinion  of  the 
conditions  as  revealed  by  the  intensity  of  the  de- 
mand. But  it  is  not  the  less  true  in  this  case  that 
prices  depend  upon  the  relation  of  demand  and  sup- 
ply, for  the  intensity  of  demand  which  determines 
whether  the  seller  will  alter  the  price,  varies  with 
the  supply  believed  to  be  available. 

Moreover,  the  supply  of  commodities  is  itself  not 
a  purely  spontaneous  matter,  but  is  the  result,  to 
some  extent,  of  men's  judgment.  The  supply  ac- 
tually available  depends  in  part  upon  the  amount 
actually  produced  and  in  part  upon  the  disposition 
of  the  owners  thereof  to  part  with  it.  Self-evident 
as  this  is,  it  requires  mention,  for  it  is  too  often 
assumed  that  the  normal  economic  process  consists 
merely  in  producing  commodities  and  placing  them 
on  sale  for  what  they  will  bring,  whereas  man's 
judgment,  as  he  seeks  the  maximum  of  want- 
satisfaction,  affects  not  only  what  is  produced, 
but  where  and  when  and  how  it  is  disposed  of. 
And  the  results  of  judgment  as  to  the  disposal  of 
commodities  are  quite  as  important  to  the  economic 
process  as  the  results  of  judgment  are  to  what 
shall  be  produced. 

27.  The  relation  of  the  law  of  value  to  price  has 
been  illustrated  by  examples  in  which  prices  are  de- 
termined by  comparing  the  values  of  commodities 
with  each  other  directly,  without  the  use  of  a  stand- 


48  THEORY  OF  ECONOMICS 

ard  measure  of  value.  The  introduction  of  a  stand- 
ard measure  of  value,  though  of  great  importance 
to  economic  activity,  in  no  way  alters  the  funda- 
mental principles  according  to  which  prices  are  de- 
termined. A  standard  measure  of  value  is  a  definite 
amount  of  some  specific  commodity  whose  value 
society  decrees  shall  be  considered  constant  in  the 
settlement  of  contracts;  that  is  to  say,  in  enforcing 
the  fulfillment  of  contracts,  society  requires  the 
payment  of  a  definite  amount  of  the  commodity 
which  is  recognized  as  the  standard,  or  its  equiva- 
lent in  value,  taking  no  account  of  variations  in 
the  value  of*  that  commodity,  which  result  from 
changes  in  the  relation  of  demand  and  supply.  The 
employment  of  the  standard  in  measuring  values  is 
not  usually  compulsory.  The  values  of  commodi- 
ties may  be  compared  with  each  other  directly,  as 
is  sometimes  done  in  trading  horses  for  example, 
or  they  may  be  compared  with  any  other  commodity 
which  may  be  agreed  upon.  But  when  society  is 
called  upon  to  enforce  the  fulfillment  of  a  contract, 
it  estimates  the  obligation  involved  by  comparison 
with  the  standard  measure  and  requires  payment 
accordingly. 

The  use  of  a  standard  measure  tends  to  con- 
ceal the  real  nature  of  the  process  of  measuring 
value,  for  its  employment  results  in  the  determina- 
tion of  the  relation  of  the  values  of  commodities  by 
comparing  each  with  a  third  commodity  instead  of 
with  each  other,  except  when  the  commodity  which 
serves  as  the  standard  measure  is  one  of  the  two 


THE  LAW  OF  VALUE  49 

directly  concerned.  And  it  may  be  that  the  in- 
dividual who  makes  the  measurement  (comparison) 
in  any  case  is  not  aware  of  the  use  of  the  com- 
modity that  is  the  standard  measure,  the  first  steps 
in  the  process  and  the  function  of  the  standard 
measure  being  lost  to  view  in  the  complexity  of  the 
operation.  The  comparison  of  value  in  any  given 
case  may  be  made  by  the  use  of  something  other 
than  the  standard,  whose  value  has  been  determined 
in  the  first  instance  by  comparison  with  the 
standard  measure. 

When  to  this  is  added  the  fact  that  in  expressing 
value,  the  special  name  given  to  the  standard  meas- 
ure is  used,  instead  of  the  name  of  the  commodity, 
the  mystery  of  the  process  is  increased.  Thus  in 
the  United  States,  at  the  present  time  (1901),  the 
standard  measure  is  23.22  grains  of  gold.  This  is 
called  a  dollar.  In  considering  the  purchase  of  a 
hat  whose  value  is  estimated  to  be  equal  to  that  of 
46.44  grains  of  gold,  and  whose  price  accordingly  is 
said  to  be  two  dollars,  an  individual  compares  his 
want  for  the  hat  with  his  want  for  something  else, 
say  a  pair  of  gloves,  whose  price  is  also  two  dollars. 
As  a  matter  of  fact  the  prices  of  the  hat  and  gloves 
were  determined  in  the  first  instance  by  a  compari- 
son of  their  values  with  the  value  of  23.22  grains 
of  gold,  or,  perhaps,  by  comparison  with  something 
else  whose  value  had  been  compared  with  the  value 
of  gold.  For  that  matter,  the  estimate  of  the  rela- 
tion of  the  values  of  the  hat  and  gloves  to  the 
value  of  gold  may  have  been  reached  by  any  num.- 


50  THEORY  OF  ECONOMICS 

ber  of  intermediate  measurements,  and  throughout 
the  operation  no  one  may  have  been  aware  of  the 
fact  that  he  was  making  a  measurement.  The 
measurement  may  have  been  accomplished  merely 
as  a  result  of  the  choice  of  this  or  that  thing  in 
preference  to  another.  To  the  person  considering 
the  relation  of  his  want  for  the  hat  to  his  want  for 
the  gloves,  expecting  probably  to  pay  for  one  or  the 
other  with  dollars  of  paper  or  of  silver,  the  function 
performed  by  the  23.22  grains  of  gold  does  not 
appear,  and  he  comes  to  view  a  dollar  as  standing 
for  an  absolute  amount  of  value,  quite  apart  from 
its  connection  with  any  particular  thing,  a  condi- 
tion which  further  consideration  shows  to  be  an  im- 
possibility. 

Still  another  source  of  confusion  is  found  in 
the  fact  that  society  may  recognize  in  law  more 
than  one  standard  measure,  calling  them  all  by 
the  same  name,  and  leaving  it  to  individuals  to  use 
whichever  they  prefer.  Thus,  if  society  so  decrees, 
the  standard  measure  may  be  23.22  grains  of  gold, 
371.25  grains  of  silver,  and  anything  else  having 
value,  even  a  promise  to  pay  whose  value  will  de- 
pend upon  the  confidence  of  the  people  in  it.  Bach 
of  these  may  be  called  a  dollar.  But  it  does  not 
follow  that  the  values  of  these  several  dollars  will 
be  equal.  Whether  they  are  or  not  will  depend 
upon  whether  their  respective  powers  to  attract 
wants  are  equal.  A  community  might  have  several 
John  Smiths,  but  they  would  not  necessarily  have 
anything  in  common  except  their  name.  Exactly 


THE  LAW  OF   VALUE  51 

the  same  is  true  when  society  recognizes  several 
standards  of  value  and  calls  them  by  the  same 
name.  A  dollar  is  not  a  definite  amount  of  value; 
it  is  a  definite  amount  of  some  commodity  or  com- 
modities, to  which  that  name  is  arbitrarily  given 
and  the  values  of  which  depend  upon  the  relation 
of  the  supply  thereof  to  the  demand  therefor.1 

28.  As  has  been  seen,  a  movement  in  price  may 
be  due  to  causes  affecting  the  commodity  directly 
or  to  causes  affecting  the  commodity  which  serves 
as  a  measure.  In  any  given  case  it  is  impossible  to 
determine  to  which  of  these  the  movement  in  price 
is  due,  except  in  so  far  as  the  conditions  of  supply 
and  demand  in  their  relation  to  the  commodities 
can  be  determined.  In  measuring  value  it  is  as- 
sumed that  the  value  of  the  measure  is  constant, 
but  this  assumption  may  be  contrary  to  fact,  for  the 
value  of  the  measure  is  dependent  upon  the  relation 
between  the  supply  thereof  and  the  demand  therefor, 
the  same  as  are  the  values  of  other  commodities,  and 
those  conditions  are  subject  to  variation.  This  fact 
receives  added  importance  from  the  widespread  but 
erroneous  belief  that  when  society  selects  a  definite 
amount  of  some  commodity  as  a  standard  measure 
of  value,  it  fixes  not  only  the  amount  of  the  com- 
modity which  is  to  be  recognized  as  a  standard,  but 
also  the  value  of  that  commodity  as  well.  But  so- 

1  It  is  not  to  be  inferred  from  the  above  statement  that  it 
is  a  matter  of  indifference  what  or  how  many  standards  of 
value  society  adopts.  That  is  a  matter  which  belongs  to  the 
discussion  of  the  money  problem. 


52  THEORY  OF  ECONOMICS 

ciety's  refusal  to  take  account  of  fluctuations  in  the 
value  of  its  standard  when  contracts  are  enforced, 
does  not  make  the  value  of  the  standard  constant. 
If  society's  recognition  of  some  commodity  as  a 
standard  measure  of  value  affects  the  relation  of 
the  supply  of  that  commodity  to  the  demand  there- 
for, the  act  of  society  affects  the  value  of  that  com- 
modity. But  so  long  as  society  can  not  absolutely 
control  both  supply  and  demand,  it  can  not  abso- 
lutely fix  values. 


THE  ECONOMIC  PROCESS 


29.  The  efforts  of  men  to  satisfy  their  wants 
taken  in  their  entirety  constitute  the  economic 
process,  which  may  be  defined  as  the  totality  of 
human  activities  in  their  relation  to  the  pursuit  of 
the  satisfaction  of  wants.  Rightly  viewed,  this 
process  constitutes  a  whole  composed  of  many 
parts.  A  due  recognition  of  this  fact  is  absolutely 
essential  to  the  attainment  of  valid  economic  prin- 
ciples. The  nature  of  the  process  will  be  better 
understood  by  considering  the  general  character  of 
the  activity  of  which  it  is  composed,  the  normal 
manifestations  of  that  activity,  the  conditions  es- 
sential to  progress  and  the  steps  in  the  process. 

Ely,  Monopolies  and  Trusts,  chap.  i. ;  Competition :  its 
Nature,  its  Permanency,  and  its  Beneficence,  in  publica- 
tions of  the  American  Economic  Association,  Third  Series, 
Vol.  II.,  p.  55;  Sidgwick,  The  Principles  of  Political 
Economy,  Bk.  II.,  chap,  x.;  Mill,  Principles  of  Political 
Economy,  Bk.  II.,  chap,  xvi.,  #  2  ;  Baker,  Monopolies  and 
the  People ;  Jenks,  The  Trust  Problem;  Walker,  Political 
Economy,  §  129 ;  Clark  and  Giddings,  The  Modern  Dis- 
tributive Process,  chap,  ii.;  Laughlin,  Elements  of  Political 
Economy,  $  94. 


54  THEORY  OF  ECONOMICS 

30.  In  seeking  the  satisfaction  of  wants,  as  in  all 
other  manifestations  of  his  nature  as  a  human 
being,  man  acts  as  a  member  of  society.  That  is 
to  say,  in  their  economic  pursuits,  men  sustain 
relations  to  each  other,  and  as  the  distinguishing 
characteristic  of  society  is  relationship,  men  are 
social  beings  economically  as  in  other  respects.  It 
will  not  suffice,  then,  to  isolate  acts  for  the  study  of 
their  characteristics  and  from  such  study  to  formu- 
late general  principles.  To  learn  the  true  signifi- 
cance of  any  act,  it  must  be  observed  not  only  by 
itself  but  also  in  relation  to  other  acts.  For  no  act  by 
itself  reveals  its  full  economic  significance,  its  com- 
plete bearing  upon  the  satisfaction  of  wants,  because 
it  is  not  without  influence  upon  other  acts.  Though 
some  may  seem  to  be  concerned  only  with  the 
individual  who  performs  them,  they  are  never 
wholly  devoid  of  social  character.  This  fact  can 
never  safely  be  lost  to  sight  in  economic  investiga- 
tions. True,  the  economic  process  as  a  whole  is  a 
more  or  less  intangible  affair.  Men  seldom  think 
of  the  social  character  of  their  efforts.  An  individ- 
ual turns  his  activity  in  this  or  in  that  direction 
because  he  believes  that  the  course  selected  will 
best  conduce,  under  the  circumstances,  to  the  satis- 
faction of  his  desires.  He  may  be  and  usually  is 
wholly  unaware  of  the  fact  that  his  choice  has  been 
determined  in  no  small  degree  by  other  conditions, 
and  that  his  own  act,  which  seems  to  have  but 
slight  consequences  apart  from  himself  and  at  most 
his  immediate  neighbors,  is  in  fact  part  of  a  whole 


THE  ECONOMIC  PROCESS  55 

and  in  vital  relation  with  it.  But,  though  the 
activities  which  constitute  the  economic  process 
present  themselves  as  individual  matters,  when  one 
passes  from  the  visible  and  apparent  to  inquire  as 
to  causes  and  effects,  the  true  character  of  individ- 
ual action  as  part  of  an  organic  whole  becomes 
evident. 

On  the  other  hand,  activity  possesses  an  indi- 
vidual, as  well  as  a  social  character.  The  economic 
process  manifests  itself  in  the  form  of  the  activity 
of  individuals;  its  ends  are  realized  through  the 
efforts  of  individuals  to  satisfy  their  wants.  In  the 
last  analysis,  social  activity  is  but  the  activity  of 
individuals.  Hence  economic  activity  is  individual 
activity;  economic  conditions  are  the  result  of  indi- 
vidual conditions  ;  and  economic  progress,  if  realized 
at  all,  is  attained  only  when  individual  activity, 
directed  primarily  from  the  individual's  standpoint 
and  for  individual  ends,  is  so  ordered  as  to  promote 
the  efficiency  of  the  process  as  a  whole. 

Nor  is  this  true  only  in  the  case  of  such  activity 
as  purports  to  be  directed  towards  private  ends. 
The  activity  which  is  professedly  aimed  at  the 
attainment  of  social  ends  is  after  all  individual 
activity  and  the  ends  sought  are  individual  ends  in 
that  they  are  an  individual's  idea  of  social  ends. 
The  difference  between  the  activity  of  the  philan- 
thropist and  that  of  the  manufacturer,  in  their  rela- 
tion to  the  general  welfare,  is  primarily  a  difference 
in  the  conscious  motive  which  each  sets  before  him, 
rather  than  in  the  method  of  attaining  the  common 


56  THEORY  OF  ECONOMICS 

good.  There  is  or  may  be  a  wide  difference  be- 
tween the  wants  of  the  two,  but  the  activity  of  each 
is  individual  activity;  it  follows  in  both  cases  from 
individual  judgment;  and,  in  the  case  of  the  manu- 
facturer as  well  as  of  the  philanthropist,  there  is  a 
vital  relation  between  the  individual  act  and  the 
economic  process  as  a  whole.  The  extent  to  which 
each  promotes  the  general  good  depends  upon  the 
harmony  existing  between  the  individual  choice  and 
the  reqirements  of  that  general  good.  Whether 
the  result  of  the  action  of  the  philanthropist  will  in 
the  end  be  promotive  of  the  progress  of  society  can 
not  be  foretold  with  greater  certainty  or  complete- 
ness than  can  the  results  of  the  acts  of  the  manu- 
facturer or  of  any  other  person,  whose  conscious 
motives  seem  to  center  directly  upon  self. 

Individual  activity,  then,  is  the  immediate  object 
of  economic  investigation.  But  to  understand  indi- 
vidual activity  and  especially  to  arrive  at  conclu- 
sions which  will  have  more  than  a  passing  signifi- 
cance, individual  activity  must  be  considered  both 
in  its  social  and  in  its  individual  character. 

31.  The  question  as  to  what  sort  of  activity  is 
normal  to  the  economic  process  is  one  of  the  first 
inquiries  that  arise  when  the  attempt  is  made  to 
discover  the  principles  which  govern  in  that  process. 
To  determine  what  constitutes  normal  economic 
activity,  it  is  necessary  to  ascertain  the  conditions 
essential  to  the  attainment  of  the  satisfaction  of 
wants,  for  that  which  is  inseparable  from  success  in 
the  effort  to  satisfy  wants  must  be  considered  nor- 


THE  ECONOMIC  PROCESS  57 

mal  to  the  process.  Observation  of  the  process 
shows  that  success  in  securing  the  satisfaction  of 
wants  requires  (1)  that  the  obstacles  to  want-satis- 
faction be  surmounted,  and  (2)  that  the  individual 
possess  such  economic  strength  as  will  enable  him  to 
surmount  those  obstacles.  Self-evident  and  even 
commonplace  as  these  facts  may  seem,  they  are  of 
great  importance  to  economic  theory.  From  these 
two  essentials  to  success  it  follows  that  the  activity 
of  an  individual  seeking  want-satisfaction  will  be 
directed  both  towards  surmounting  the  obstacles  in 
the  way  of  the  satisfaction  of  wants  and  towards 
acquiring  the  economic  strength  necessary  thereto. 
Turning  to  actual  experience,  it  is  seen  that  this  is 
just  what  men  do. 

But  these  two  aims  are  closely  related.  Though 
they  may  present  themselves  to  individuals  as  dis- 
tinct, as  a  matter  of  fact  they  are  by  no  means 
independent  of  each  other.  For,  it  will  be  observed, 
it  is  by  surmounting  obstacles  and  securing  the 
satisfaction  of  wants  that  economic  strength  is 
acquired,  and  it  is  by  acquiring  economic  strength 
that  one  is  able  to  surmount  the  obstacles  to  want- 
satisfaction.  In  other  words,  every  act,  viewed 
from  the  standpoint  of  its  economic  significance  is 
at  once  an  effort  to  surmount  obstacles  to  the  satis- 
faction of  wants  and  an  effort  to  acquire  economic 
strength  which  makes  possible  the  surmounting  of 
obstacles. 

32.  The  importance  of  the  above  conclusion  be- 
comes especially  marked  when  considered  in  its 


58  THEORY  OF  ECONOMICS 

bearing  upon  the  activity  of  men  in  society.  Here 
rivalry  appears  between  individuals,  because  the 
attempt  to  satisfy  wants  gives  rise  to  conflict  of 
interests.  Thus  men  appear  as  rivals  in  endeavor- 
ing to  secure  trade,  in  seeking  employment,  in 
bidding  for  contracts,  in  settling  upon  terms  for  the 
division  of  the  results  of  a  common  enterprise,  and 
in  many  other  ways.  Rivalry  of  interest  leads  to 
contest;  this,  as  an  economic  phenomenon,  is  called 
competition,  which  may  be  denned  as  the  contest 
between  rival  interests  among  members  of  society  in 
the  pursuit  of  the  satisfaction  of  their  wants.  Though 
the  existence  of  competition  in  many  instances  may 
be  seen  and  the  parties  thereto  easily  recognized, 
competition  is  not  limited  to  such  cases.  For  a 
rivalry  of  interests  often  exists  and  influences  activ- 
ity without  a  definite  knowledge  on  the  part  of 
those  concerned  as  to  who  their  rivals  are  or  as  to 
the  exact  nature  of  the  rival  interests.  In  fact, 
there  is  rivalry  of  interests  wherever  the  effort  by 
one  to  satisfy  his  wants  interferes  with  the  efforts 
of  another. 

Viewed  in  relation  to  the  efforts  of  individuals  to 
secure  the  satisfaction  of  their  wants,  rival  interests 
present  themselves  as  obstacles  to  the  accomplish- 
ment of  that  end.  From  the  standpoint  of  individ- 
uals, then,  competition  is  the  effort  to  surmount  the 
obstacles  to  the  satisfaction  of  wants,  which  are 
involved  in  rival  interests  among  members  of  soci- 
ety. As  thus  described,  competition  is  a  normal 
economic  phenomenon,  and  the  activity  involved  in 


THE  ECONOMIC  PROCESS  59 

competition  must  be  considered  normal,  because  it 
arises  naturally  from  the  attempt  of  individuals 
as  members  of  society  to  satisfy  their  wants. 

Activity  is  directed  also  to  acquiring  eco- 
nomic strength,  without  which  obstacles  could  not 
be  surmounted  and  wants  would  remain  unsatis- 
fied. This  appears,  for  example,  in  the  attempt 
of  individuals  to  collect  enough  of  the  neces- 
saries of  life  to  make  them  independent  of 
unforeseen  accidents;  it  appears  also  in  the 
effort  to  obtain  such  tools  and  other  instruments 
as  may  enable  one  to  secure  the  satisfaction 
of  his  wants  more  efficiently.  It  may  manifest 
itself  in  the  efforts  of  an  individual  to  secure  to 
himself  alone  the  economic  strength  which  will 
enable  him  to  surmount  opposing  obstacles,  or  it 
may  consist  in  the  union  of  the  forces  of  several  to 
the  end  that  the  combined  strength  may  be  able  to 
accomplish  that  for  which  the  strength  of  each  by 
himself  is  inadequate.  Moreover,  economic  strength 
may  result  either  from  a  union  of  forces  which  in- 
volves a  definite  agreement  or  from  a  common 
policy  which  arises  merely  from  the  recognition  by 
each  that  his  interests  will  be  promoted  by  acting 
in  accord  with  others.  There  is  doubtless  great 
difference  in  the  permanence  and  efficacy  of  the  two 
methods  of  securing  common  action,  but  to  the 
extent  that  they  are  effective,  each  gives  to  those 
concerned  increased  economic  strength.  Indeed, 
the  common  policy  is  not  necessarily  a  conscious 
one.  Economic  strength  is  developed  wherever  men 


60  THEORY  OF  ECONOMICS 

act  in  harmony  with  each  other  instead  of  in  antag- 
onism to  each  other.  But  whether  economic 
strength  results  from  the  efforts  of  individuals  by 
and  for  themselves  alone  or  from  the  working 
together  of  several  to  secure  the  advantage  that 
comes  from  united  effort,  and  whether  the  united 
effort  results  from  a  specific  agreement  or  from  the 
common  impulse  of  those  concerned,  the  fundamen- 
tal character  of  the  phenomenon  is  the  same.  It  is 
concentration  of  economic  power. 

Economic  strength  gives  power  of  control  over 
the  conditions  for  success  in  the  satisfaction  of 
wants.  When  this  affects  the  relation  of  men  in 
society,  it  becomes  monopolization,  which  may  be 
defined  as  power  of  control  in  the  contest  between  rival 
interests.  From  the  standpoint  of  the  individual, 
monopolization  is  the  concentration  of  economic 
strength  which  enables  one  to  oppose  the  rival 
interests  that  are  an  obstacle  to  the  satisfaction  of 
his  wants.  As  such,  monopolization,  like  competi- 
tion, is  a  normal  economic  phenomenon,  and  the 
activity  aimed  at  the  attainment  of  monopolization 
must  be  considered  normal,  for  it  also  arises  natu- 
rally and  necessarily  in  connection  with  the  efforts 
of  individuals  as  members  of  society  to  satisfy  their 
wants. 

33.  Both  competition  and  monopolization  are 
associated  with  rivalry  of  interests  in  society.  The 
former  is  the  attempt  to  surmount  the  obstacles  to 
want-satisfaction  which  result  from  rivalry;  the 
latter  is  the  concentration  of  economic  strength 


THE  ECONOMIC  PROCESS  61 

which  is  necessary7  to  oppose  rival  interests.  But, 
as  has  been  seen,  the  surmounting  of  obstacles  and 
the  concentration  of  economic  strength,  though 
they  may  appear  as  distinct  aims,  are  in  fact  inter- 
dependent, and  are  features  of  every  economic 
act.  The  satisfaction  of  wants  which  results  from  and 
can  be  attained  only  by  surmounting  obstacles,  is 
the  condition  requisite  to  the  acquirement  of  eco- 
nomic strength,  which  in  turn  is  the  condition 
requisite  for  surmounting  obstacles.  From  this  it 
follows  that  competition  and  monopolization  sustain 
a  close  relation  to  each  other.  These  phenomena 
are,  in  fact,  attendant  upon  all  activity  which  in- 
volves the  rivalry  of  members  of  society  in  the 
effort  to  satisfy  their  wants. 

From  the  nature  of  competition  and  the  con- 
ditions under  which  men  act,  it  results  that  there 
is  always  some  competition,  because  rivalry  of 
interests  always  exists,  but  free  competition  is  im- 
possible. Competition  means  contest  between  men. 
Free  competition,  then,  means  unrestricted  contest 
between  men,  and  the  conditions  for  such  contest 
do  not  exist.  For  competition  to  be  unrestricted, 
the  equipment  of  men  for  contesting  must  be  equal, 
else  one  of  the  parties  will  achieve  success  and  the 
other  will  lose  his  ability  to  compete  and  competi- 
tion will  cease.  The  inequalities  among  men  are 
themselves  insuperable  obstacles  to  free  competi- 
tion. 

Furthermore,  for  competition  to  be  absolutely  free, 
not  only  must  men  meet  on  equal  terms  in  the  con- 


62  THEORY  OF  ECONOMICS 

test,  but  their  resources  for  maintaining  the  contest 
must  be  unlimited,  else  the  contest  will  be  carried 
to  a  finish  and  cease  because  of  exhaustion.  But 
the  resources  which  enable  men  to  contest  with 
rivals  are  limited  and  this  limits  freedom  of  compe- 
tition. Indeed,  nature  itself  places  restrictions 
upon  competition  through  limitations  in  the  sup- 
ply of  commodities  and  of  the  means  for  pro- 
duction. The  extent  of  the  limitations  varies. 
There  are  wide  differences  in  the  degree  of  compe- 
tition at  different  times  and  under  different  circum- 
stances. It  may  be  moderate  or  it  may  be  intense, 
but  it  can  never  be  full  and  free,  i.  e. ,  it  can  never 
be  unrestricted. 

It  was  at  one  time  supposed  that  the  only 
impediment  to  free  competition  consisted  in  legisla- 
tive enactments,  which  secured  advantages  to  some 
at  the  expense  of  others.  Accordingly  it  was  be- 
lieved that  the  repeal  of  those  enactments,  leaving 
men  on  equal  terms  before  the  law,  would  insure 
entire  freedom  of  competition.  But  it  has  come  to 
be  realized  that  freedom  from  legislative  control  is 
at  best  negative  freedom,  and  that  true  freedom 
involves  much  more. 

It  follows,  furthermore,  from  the  nature  of 
monopolization  and  the  conditions  under  which  it 
appears  that  the  element  of  monopolization  is 
always  present  but  absolute  monopolization  is  impos- 
sible. It  is  necessary  to  distinguish  here  between 
power  of  control  over  specific  commodities  and  power 
of  control  in  the  contest  between  rival  interests, 


THE  ECONOMIC  PROCESS  63 

though  the  two  are  closely  related.  A  large  degree 
of  power  of  control  over  commodities  is  given  by 
the  mere  fact  of  ownership.  But  the  effect  of  own- 
ership upon  the  relation  of  men  in  society  varies 
greatly  under  different  circumstances.  On  the  one 
hand,  it  is  evident  that  the  mere  fact  of  ownership 
confers  upon  the  owner  some  power  of  control  in 
his  contest  with  rivals,  and  this  power  of  control  is 
monopolization,  be  it  ever  so  small.  Indeed,  so 
long  as  contest  between  rivals  exists  in  society  the 
element  of  monopolization  can  never  be  wholly 
wanting,  for  some  power  of  control  is  inseparable 
from  such  contests.  But  however  absolute  and 
extensive  ownership  may  be,  neither  it  nor  any 
other  condition  can  confer  upon  one  absolute  power 
of  control  in  the  contest  with  rivals.  There  is 
always  a  limit  beyond  which  no  man  can  control 
others  and  make  them  subservient  to  himself.  As 
in  the  case  of  competition,  there  are  wide  differ- 
ences between  the  degrees  of  monopolization  in 
different  cases.  In  many  instances,  it  is  so  slight 
as  to  be  of  little,  if  any,  practical  moment,  while  in 
others  it  may  be  so  great  as  to  be  fraught  with  most 
serious  consequences.  But  absolute  monopolization 
cannot  exist.1 

The  foregoing  analysis  of  the  nature  and  per- 
sistence of  competition  and  monopolization  is  of 
the  highest  importance  to  the  interpretation  of  the 
economic  process.  For,  if  free  competition  is  im- 

^ee  Pt.  III.,  iii.  Exchange. 


64  THEORY  OF  ECONOMICS 

possible,  an  economic  theory  which  rests  upon  its 
assumed  existence  cannot  be  an  adequate  interpre- 
tation of  human  activity  in  its  relation  to  want- 
satisfaction.  On  the  other  hand,  if  monopolization 
is  inseparable  from  the  association  of  men  for  eco- 
nomic ends,  the  economic  theory  which  treats  it  as 
incidental  and  temporary  must  also  be  inadequate. 
Moreover,  the  view  of  competition  and  monopoliza- 
tion here  presented  has  more  than  a  theoretical 
importance.  Influenced  largely  by  the  teachings  of 
economics,  the  opinion  prevails  very  generally  that 
the  ideal  condition  of  society  is  one  in  which  com- 
petition is  full  and  free  and  that  in  some  way  or 
other  such  a  condition  is  attainable.  Hence  efforts 
are  directed  towards  the  realization  of  that  end. 
Thus  far  the  results  obtained  give  but  little  hope  of 
success  and  many  persons,  in  despair,  are  inclined 
to  extreme  measures.  The  practical  bearing  of  the 
conclusions  here  reached  is  to  be  found  in  their 
teaching  that  social  evils,  in  so  far  as  they  result 
from  either  competition  or  monopolization,  are  to 
be  remedied  by  such  measures  as  will  prevent  them 
from  becoming  excessive  rather  than  by  attempts 
to  eradicate  them,  for  their  eradication  is  impos- 
sible without  destroying  society  itself. 

34.  The  fundamental  condition  of  all  progress  is 
that  the  fittest  should  survive  and  become  more  fit. 
If  the  opposite  were  true,  if  the  less  fit  survived 
and  became,  as  time  passed,  less  fit,  not  only  would 
there  be  no  progress,  but  there  would  be  actual  ret- 
rogression. It  is  because  in  farming,  in  manufac- 


THE  ECONOMIC  PROCESS  65 

turing,  in  commerce,  and,  indeed,  in  all  spheres 
of  activity,  better  methods  supplant  poorer,  that 
society  progresses  in  economic  efficiency.  Horse- 
power has  been  supplemented  and  for  some  pur- 
poses supplanted  by  steam-power;  the  stage-coach 
and  sail-boat  have  in  large  measure  given  place  to 
the  railroad  and  steamboat;  after  the  sickle  came 
the  cradle,  then  the  reaper,  the  self-binder  and 
finally  the  combination  harvester,  which  cuts, 
gathers  and  threshes. 

In  this  respect  economic  progress  but  shares  in 
the  condition  necessary  for  development  of  any  sort. 
Even  moral  progress  is  attained  only  through  the 
survival  of  the  fittest  and  its  increasing  fitness. 
Higher  concepts  of  rights  and  duties  pervade  soci- 
ety, taking  the  place  of  such  as  are  inferior — only 
thus  does  one  age  become  better  than  its  predeces- 
sor. Rights  of  life,  of  family,  of  property,  of 
speech,  of  free-movement,  of  self-government, — in 
all  of  these,  as  history  shows,  higher  and  broader 
ideals  have  supplanted  lower  and  narrower  ones  and 
a  better  civilization  has  resulted. 

35.  The  process  of  selection  by  which  the  survival 
of  the  fittest  is  realized  involves  a  contest.  The 
old  does  not  give  place  to  the  new  without  a  strug- 
gle. Indeed,  it  may  be  that  fitness  can  be  deter- 
mined only  by  a  contest.  In  society  this  contest 
involves  rivalry  of  interests  among  its  members, 
for  it  is  always  to  the  immediate  or  apparent  inter- 
est of  some  that  the  old  should  continue,  and  to  the 
interest  of  others  that  the  new  should  be  substituted 


66  THEORY  OF  ECONOMICS 

for  the  old.  This  contest  is  competition,  and  here- 
in appears  the  fundamental  reason  for  its  existence, 
— its  purpose  in  the  economic  process.  Competition 
is  one  feature  of  the  process  of  selection.  It  is 
through  competition  that  the  fittest  supplants  the 
less  fit,  hence  competition  is  absolutely  essential  to 
progress. 

But  the  survival  of  the  fittest  is  not  accomplished 
through  competition  alone.  If  the  fittest  is  to 
supplant  the  less  fit,  it  must  possess  power  of  con- 
trol sufficient  to  enable  it  to  carry  on  the  contest 
and  to  win.  This  power  of  control  is  monopoliza- 
tion. Herein  lies  the  importance  of  monopolization 
to  economic  progress.  It  performs  a  function  in 
the  economic  process  as  essential  as  that  of  compe- 
tition. Monopolization  enables  the -contest  to  be 
carried  on  by  which  the  less  fit  is  supplanted. 

In  addition  to  the  services  mentioned,  com- 
petition and  monopolization  render  others,  in  that 
each  tends  to  counteract  the  evils  of  excess  in  the 
other.  Competition  is  strife  and  strife,  if  car- 
ried too  far,  becomes  exhausting.  Competition 
is  not  an  end  in  itself;  it  is  a  means  to  an 
end,  the  survival  of  the  fittest.  To  prevent 
competition  from  defeating  its  own  end,  through 
exhaustion  of  energy,  there  must  be  such  power  of 
control  as  will  prevent  the  contest  from  being  too 
long  continued.  Monopolization,  then,  besides 
making  possible  a  contest  with  rival  interests, 
affords  the  power  of  control  necessary  to  prevent 
exhaustion. 


THE  ECONOMIC  PROCESS  67 

But  the  mere  possession  of  power  of  control  does 
not  insure  progress.  To  accomplish  this,  the 
power  must  be  used.  Without  activity  power  of 
control  results  in  stagnation  and  deterioration. 
That  which  is  necessary  to  call  power  of  control 
into  activity,  is  contest  with  rival  interests,  /.  <?., 
competition.  Competition,  then,  not  only  aids 
in  the  survival  of  the  fittest,  but  prevents  that 
which  survives  from  becoming  less  fit  through 
stagnation. 

The  view  here  presented  of  the  nature  of  com- 
petition and  monopolization  and  of  the  function 
performed  by  them  in  the  economic  process,  may 
seem  at  first  to  be  wholly  at  variance  with  the 
view  of  these  phenomena  commonly  entertained. 
Further  examination,  however,  will  show  that 
whatever  of  difference  exists,  is  due  in  part  to  the 
fact  that  the  popular  view  rests  upon  a  superficial 
analysis  of  the  economic  process  and  in  part  to  an 
unscientific  use  of  terms.  The  statement  that  the 
primary  service  of  competition  is  to  aid  in  securing 
the  survival  of  the  fittest  is  reflected  in  the  popular 
dictum  that  "competition  is  the  life  of  trade."  The 
further  fact  that  competition  is  not  necessarily  a 
a  blessing,  that  its  excess  may  mean  decreased  eco- 
nomic efficiency,  is  a  truth  already  recognized  by 
the  popular  mind,  and  one  that  is  beginning  to 
affect  economic  theory. 

In  the  case  of  monopolization,  the  difference 
between  the  view  here  presented  and  popular  opin- 
ion is  greater  than  in  the  case  of  competition.  As 


68  THEORY  OF  ECONOMICS 

yet  but  little  attempt  has  been  made  to  analyze  the 
economic  process  for  the  purpose  of  ascertaining 
the  place  of  monopolization  therein.  A  good  and 
a  bad  side  to  concentration  of  strength  are  recog- 
nized by  society  substantially  as  in  the  present 
analysis,  but  on  its  good  side  the  concentration  of 
energy  is  called  "cooperation"  or  the  "growth  of 
large  industries,"  while  on  its  bad  side  it  is  called 
"monopoly."  But  the  phenomena  described  by 
these  terms  are  inseparable.  Both  "cooperation" 
and  the  "growth  of  large  industries"  involve  an 
increase  in  the  power  of  those  concerned  to  con- 
trol the  conditions  of  success  in  the  contest  with 
rivals. 

Moreover,  the  popular  view  considers  the  element 
of  monopolization  to  be  present  only  when  power 
of  control  is  so  extensive  that  the  welfare  of  society 
is  believed  to  be  endangered  by  it;  while  the  present 
analysis  insists  on  recognizing  the  phenomenon  of 
power  of  control  and  on  calling  it  by  the  same 
name,  regardless  of  its  amount.  It  requires  but 
slight  consideration  to  see  that  the  essential  charac- 
ter of  monopolization,  even  in  the  popular  view,  is 
power  of  control.  But  power  of  control  is  relative 
and  should  be  recognized  as  such  wherever  it  is 
found. 

36.  In  the  economic  process  as  society  is  now 
ordered,  there  are  two  steps; — (1)  the  correlation 
of  things  and  wants  to  bring  into  existence  want- 
attracting  power  and  (2)  the  division  of  this  want- 
attracting  power  among  members  of  society.  The 


THE  ECONOMIC  PROCESS  69 

first  of  these  steps  is  called  production.  If  in  the 
economic  process  each  man  acted  wholly  by  himself, 
there  would  be  but  this  one  step.  But  in  society  men 
combine  their  forces  to  render  them  more  efficient. 
From  this,  there  arises  the  necessity  of  dividing  the 
results  of  production  among  the  members  of  society. 
This  step  is  called  distribution.  Before  wants  are 
satisfied  a  third  step  is  necessary,  i.  <?.,  the  actual 
application  of  things  to  wants.  But  this,  the  con- 
sumption of  commodities,  lies  outside  the  scope  of 
economic  investigation,  except  in  so  far  as  it  affects 
production  and  distribution. 


PART  II 


PRODUCTION 


PRODUCTION 


37.  The  process  of  correlating  wants  and  things 
has  been  described  as  the  first  step  in  the  general 
economic  process.  This,  as  has  been  said,  is  the 
production  of  wealth.  It  consists  in  bringing 
wants  and  things  into  such  relation  that  want- 
attracting  power  results,  and  may  be  accomplished 
in  either  of  two  ways:  (1)  by  the  adaptation  of 
things  to  wants  and  (2)  by  the  adaptation  of  wants 
to  things.  The  former  is  the  production  of  supply; 
the  latter  is  the  production  of  demand. 

In  its  ordinary  forms,  the  process  of  produc- 
ing a  supply  of  wealth  is  easily  recognized.  The 
farmer  plows,  sows  and  reaps,  and  there  is  produced 
grain,  which  as  food  nourishes  man;  or  fibres, 
which,  made  into  textiles,  protect  and  adorn  him. 
The  miner  drills  and  blasts,  and  there  is  produced 

Sidgwick,  The  Principles  of  Political  Economy,  Bk.  I. , 
chap,  i.;  Ely,  Outlines  of  Economics,  Bk.  II.,  Part  I.,  chap, 
i.;  Mill,  Principles  of  Political  Economy,  Bk.  I.,  chapters 
iii.,  xii.;  Walker,  Political  Economy,  §§45,  46,  49-53;  Laugh- 
lin,  Elements  of  Political  Economy,  chapters  ii.,  iii.;  Mar- 
shal, Principles  of  Economics,  Bk.  IV.,  chapters  ii.,  xiii. 


i 


74  THEORY  OF  ECONOMICS 

fuS,  which  warms  the  body  or  aids  in  generating 
power.  The  carpenter  saws,  planes,  and  fits,  and 
there  is  produced  a  dwelling-house  or  a  factory. 
But  productive  activity  is  not  limited  to  assisting 
nature  to  bring  forth  commodities  nor  to  changing 
the  forms  of  materials  in  order  to  adapt  them  to 
wants.  It  includes  also  the  activity  engaged  in 
transporting,  storing,  exchanging  and  otherwise 
making  available  that  which  may  attract  wants. 
The  farmer,  mechanic  and  miner  produce  wealth; 
and  so  also  do  the  carrier,  the  merchant  and  the 
banker,  because  the  latter,  as  truly  as  the  former, 
are  engaged  in  forms  of  activity  which  increase  the 
power  of  want-attraction.  For,  in  order  that  a 
commodity  should  be  able  to  attract  wants,  it  is 
necessary  (1)  that  it  possess  the  requisite  phys- 
ical properties;  (2)  that  it  have  the  desired 
form;  (3)  that  it  be  at  the  place  where  it  is  wanted; 
and  (4)  that  it  exist  at  the  time  when  it  is 
wanted.  He  who  sows  and  cultivates  aids  in  bring- 
ing together  the  requisite  physical  properties.  He 
who  grinds  the  wheat  or  saws  the  log  or  hammers 
the  iron  aids  in  giving  proper  form  to  commodities. 
That  these  are  engaged  in  producing  wealth  is 
evident.  But  the  railroad  employees  from  presi- 
dent to  section-hand  aid  in  placing  commodities 
where  they  are  wanted.  So  also  do  the  merchant 
and  the  banker.  These,  then,  produce  wealth  as 
truly  as  do  the  farmer  or  the  mechanic,  for  it  is 
fully  as  important  to  the  existence  of  want- attract- 
ing power  that  things  should  be  where  they  are 


PRODUCTION  75 

wanted  as  that  they  should  have  the  requisite  phys- 
ical properties  and  form.  In  addition  to  this,  the 
merchant,  whether  jobber  or  retailer,  aids  in  mak- 
ing commodities  available  when  they  are  wanted. 
This  also  is  a  feature  of  the  production  of  a  supply 
of  wealth.  He  who  keeps  ice  from  winter,  when 
it  is  wanted  but  little,  until  summer,  when  the 
want  for  it  is  intense,  produces  wealth  just  as  truly 
as  the  miner  who  digs  coal  and  aids  in  bringing  it 
to  the  surface.  The  same  is  true  of  all  who  by 
storing  commodities  keep  them  until  the  want  for 
them  increases  and  they  come  to  have  an  increased 
want-attracting  power.  The  production  of  wealth 
is  not  the  mere  production  of  commodities,  it  is  the 
production  of  want- attracting  power. 

Furthermore,  as  has  been  pointed  out,  wealth 
does  not  consist  wholly  of  tangible  things.  Hence 
the  production  of  wealth  is  not  limited  to  those 
forms  of  activity  that  are  expended  upon  tangi- 
ble things.  The  singer  who  meets  the  want  for 
music  produces  wealth.  So  also  does  the  scholar 
searching  out  truth  and  contributing  to  the  sat- 
isfaction of  the  desire  for  knowledge;  likewise 
the  judge,  deciding  controversies  and  enunciating 
the  principles  according  to  which  peaceful  associa- 
tion is  promoted;  and  the  clergyman,  ministering  to 
man's  religious  wants.  It  might  be  maintained 
that  these  are  producers  of  wealth  even  if  the  con- 
ception of  wealth  were  limited  to  tangible  things, 
because  such  persons  indirectly  increase  the  effi- 
ciency of  the  activity  engaged  in  producing  tangi- 


76  THEORY  OF  ECONOMICS 

ble  wealth.  This,  however,  is  but  a  partial  view. 
The  wants  which  come  within  the  scope  of  eco- 
nomics are  not  simply  such  as  are  centered  upon 
tangible  things  but  include  all  that  pertain  to 
human  nature,  and  every  act  that  contributes  to 
the  production  of  that  which  will  attract  human 
wants,  is  part  of  the  productive  process. 

The  process  of  production  is  commonly  thought 
of  as  consisting  only  in  the  production  of  sup- 
ply, i.  e.,  in  the  adaptation  of  things  to  wants. 
Little  attention  has  been  given  in  economic  theory 
to  the  other  phase  of  the  process,  the  production  of 
demand,  though  in  practice  this  phase  of  the  proc- 
ess is  by  no  means  neglected.  That  wealth  is  pro- 
duced, i.  <?.,  that  want-attracting  power  is  created 
by  the  development  of  demand  is  attested  by  the 
facts  of  every  day  experience,  where  the  develop- 
ment of  demand  gives  want-attracting  power  to 
that  which  before  did  not  possess  it  or  increases 
that  power  in  commodities  which  already  possess  it 
in  some  degree.  An  example  of  this  is  found  in 
the  case  of  cotton-seed  already  mentioned,  where 
that  which  was  an  obstacle  to  the  satisfaction  of 
wants  was  changed  into  a  serviceable  commodity 
by  the  development  of  a  demand  for  it.  No  small 
part  of  the  energy  expended  in  business  is  directed 
towards  the  development  of  demand. 

38.  From  an  economic  standpoint,  an  expendi- 
ture of  energy  is  productive  whenever  it  results  in 
the  existence  of  want-attracting  power  and  unpro- 
ductive only  when  it  fails  to  accomplish  that 


PRODUCTION  77 

result.  A  view  sometimes  held  limits  productive 
activity  to  such  as  results  in  the  production  of  so- 
called  material  wealth.1  But  such  a  concept  is 
both  unscientific  and  unfortunate  in  its  practical 
effects.  If  wealth  consists  of  whatever  possesses 
want- attracting  power,  effort  should  be  considered 
unproductive  only  when  no  want-attracting  power 
results  therefrom,  i.  e.,  when  there  results  neither 
a  supply  of  something  that  is  wanted  nor  a  demand 
for  something  that  exists.  The  designation  of  effort 
as  productive  only  when  it  results  in  material 
wealth,  tends  to  overestimate  the  importance  of 
such  effort  in  comparison  with  that  which  is  not 
expended  upon  material  commodities.  And,  how- 
ever distinctly  those  who  hold  such  a  view  of  the 
difference  between  productive  and  unproductive 
effort,  may  declare  that  productive  in  this  sense  is 
not  synonymous  with  useful,  it  is  difficult  to  avoid 
leaving  the  impression  that  what  is  unproductive  is 
useless. 

39.  While,  however,  an  expenditure  of  energy  is 
not  to  be  classed  as  unproductive  so  long  as  want- 
attracting  power  results,  there  are  wide  differences 
between  the  relation  of  returns  to  outlay  under 
different  conditions,  and  these  have  an  important 
influence  upon  the  activities  of  men.  Thus  it  is 
evident  that  in  such  an  industry  as  farming,  the 
amount  of  wheat  that  any  given  acre  will  jdeld 
does  not  depend  merely  upon  the  energy  expended. 

1  Mill,  Principles  of  Political  Economy,  Bk.  I.,  chap,  iii., 


78  THEORY  OF  ECONOMICS 

It  may  be  that  where  an  acre  has  yielded  6  bushels, 
the  application  of  double  the  amount  of  energy  will 
produce  12  bushels  or  even  more,  and  that  another 
proportional  increase  in  outlay  will  produce  24 
bushels  or  more.  But  there  is  a  limit  beyond  which 
such  results  cannot  be  obtained.  If  an  acre  pro- 
duces 75  bushels  with  a  given  expenditure  of 
energy,  double  that  outlay  will  not  give  150  bushels. 

The  principle  involved  has  been  formulated  as 
follows: — in  the  production  of  commodities,  condi- 
tions arise  in  which  an  added  expenditure  of  energy 
will  not  give  a  proportional  increase  in  returns. 
This  is  called  the  law  of  diminishing  returns. 
Though  the  limits  of  the  operation  of  this  law  have 
not  been  definitely  determined,  it  is  generally  be- 
lieved that  it  applies  especially  to  the  production  of 
raw  materials,  to  the  so-called  "extractive"  indus- 
tries.1 But  since  all  industries  are  dependent  in 
some  degree  upon  raw  materials,  the  influence  of 
the  principle  reaches  with  greater  or  less  force 
throughout  the  entire  range  of  industrial  under- 
takings. 

On  the  other  hand,  there  are  many  instances 
in  which  the  returns  of  an  industry  can  be  increased 
without  a  proportional  increase  in  outlay  of  energy. 
Thus  a  railroad,  once  built  and  equipped,  can  under 
some  conditions  double  its  carrying  capacity  with- 
out necessitating  a  correspondingly  increased  out- 
lay. A  second  track  can  be  built,  the  necessary 

1  Walker,  Political  Economy,  p.  35,  et  seq. 


PRODUCTION  79 

rolling  stock  and  other  equipment  added  and  a 
sufficient  force  of  employees  provided  without  re- 
quiring twice  the  expenditure  for  the  original  road. 
The  same  is  often  true  of  manufacturing  enter- 
prises. The  principle  here  involved  constitutes  the 
law  of  increasing  returns  and  is  the  converse  of  the 
law  of  diminishing  returns.  It  may  be  thus  stated: — 
in  the  production  of  commodities,  conditions  arise 
in  which  increased  returns  do  not  require  propor- 
tional increase  in  expenditure  of  energy.  As  in 
the  case  of  the  law  of  diminishing  returns,  the 
limits  of  the  operation  of  this  law  have  not  been 
definitely  ascertained.  In  general,  it  seems  to  de- 
pend largely  upon  the  extent  to  which  human  in- 
telligence can  offset  the  limits  placed  by  nature  upon 
the  increase  of  wealth. 

The  laws  of  diminishing  and  of  increasing  re- 
turns are  of  special  importance  in  their  relation  to 
the  possible  growth  of  population  and  the  develop- 
ment of  the  standard  of  living.  To  the  extent  that 
the  law  of  diminishing  returns  prevails,  the  possi- 
ble increase  of  population  and  advance  in  the  stand- 
ard of  living  are  limited.  Should  this  law  be 
ignored  and  the  birth-rate  increase  to  the  full  limit 
of  the  procreative  capacity  of  mankind,  the  ulti- 
mate result  would  be  the  reduction  of  the  standard 
of  living  approximately  to  the  level  of  mere  animal 
existence.  There  might  even  be  a  suppression  of 
the  growth  of  population,  for  the  maintenance  of 
population  depends  upon  the  food  supply,  and  should 
this  be  inadequate,  the  increase  in  the  death-rate 


80  THEORY  OF  ECONOMICS 

would  tend  to  offset  the  effect  of  the  birth-rate  on 
the  growth  of  population.  The  influence  of  the 
law  of  diminishing  returns  is  counteracted  in  some 
degree  by  the  operation  of  the  law  of  increasing 
returns,  but  to  what  extent  this  can  be  carried  is 
uncertain.  Though  the  present  rapid  increase  in 
the  efficiency  of  the  productive  process  may  appear 
to  render'the  influence  of  the  law  of  diminishing 
returns  upon  population  and  the  standard  of  living 
comparatively  unimportant,  the  possible  future  con- 
sequences of  the  operation  of  that  law,  in  view  of 
the  tendency  of  population  to  increase,  makes  its 
recognition  by  economic  theory  imperative. 

The  laws  of  diminishing  and  increasing  returns 
are  of  importance  also  in  their  relation  to  the  work- 
ings of  competition  and  monopolization.  Where 
the  law  of  increasing  returns  is  operative  it  tends 
to  increase  the  power  of  control  of  those  in  whose 
favor  it  operates,  especially  as  compared  with  the 
power  of  those  who  produce  subject  to  the  law  of 
diminishing  returns,  for  in  production  under  the 
law  of  increasing  returns,  the  cost  per  unit  of  prod- 
uct decreases  when  the  amount  produced  increases, 
while  the  converse  is  true  in  production  under  the 
law  of  diminishing  returns, — here  the  cost  per  unit 
of  product  increases  when  the  amount  produced  in- 
creases. And  he  who  produces  at  lower  cost  than 
his  rivals,  possesses  a  greater  power  of  control  in  his 
contest  with  them.  This  is  especially  significant 
in  its  relation  to  rivalry  in  the  exchange  of  com- 
modities, where,  as  will  be  seen  later,  the  posses- 


PRODUCTION  81 

sion  of  power  of  control  enhances  the  ability  of  one 
to  obtain  the  means  for  satisfying  his  wants. 

40.  The  object  of  an  analysis  of  the  process  of 
production  is  to  ascertain  the  conditions  upon  which 
efficiency  in  this  part  of  the  economic  process 
depends.  The  inquiry  here  is  not  concerned 
with  the  technique  of  specific  industries  such  as 
farming,  engineering,  weaving  and  building,  but 
only  with  those  general  principles  which  control  in 
the  production  of  the  means  for  the  satisfaction  of 
wants.  Fundamentally  speaking,  it  may  be  said 
that  since  the  production  of  wealth  consists  in  pro- 
ducing a  supply  of  commodities  or  a  demand  for 
commodities,  the  efficiency  of  the  process  of  produc- 
tion depends  upon  the  conditions  requisite  for 
efficiency  in  these  two  directions.  The  question, 
then,  may  be  thus  stated: — (1)  given  wants,  how 
can  the  commodities  necessary  for  their  satisfaction 
be  produced  most  efficiently,  and  (2)  given  com- 
modities, upon  what  does  the  efficiency  of  the 
production  of  a  demand  therefor  depend. 

An  analysis  of  that  phase  of  the  process  of 
production  which  aims  to  provide  a  supply  of  com- 
modities shows  that  efficiency  here  depends  upon 
(1)  the  factors  of  production,  (2)  the  economic 
organization  and  (3)  the  incentive  to  activity. 

The  factors  of  production  are  situation,  capital, 
labor  and  enterprise.  The  efficiency  of  the  pro- 
ductive process  depends  first  of  all  upon  the  abun- 
dance and  character  of  these  factors.  If  they  are 
plentiful  and  of  good  quality,  the  first  condition  of 


82  THEORY  OF  ECONOMICS 

effective  production  is  met;  if  they  are  scarce  or  of 
poor  quality,  the  process  of  production  suffers 
accordingly.  Next  after  the  supply  of  the  factors 
of  production,  the  way  in  which  productive  forces 
are  organized,  conditions  the  efficiency  of  the  proc- 
ess. Just  as  in  war,  the  effectiveness  of  an  army 
depends  to  a  large  extent  upon  its  organization,  so 
in  the  process  of  producing  a  supply  of  commodities 
for  the  satisfaction  of  wants,  there  must  be  a 
thorough  organization  for  the  highest  efficiency. 
Furthermore,  the  economic  process  is  not  a  sponta- 
neous affair,  in  the  sense  that  it  must  operate  and 
that,  too,  efficiently  regardless  of  human  choice.  A 
large  and  excellent  supply  of  the  factors  of  produc- 
tion and  a  thorough  organization  can  accomplish 
little  or  nothing  without  an  incentive  that  shall 
lead  to  the  starting  of  the  process  and  inspire  its 
continuance  until  its  purpose  is  accomplished. 
Factors  and  organization  without  an  incentive 
resemble  a  machine  without  motive  power.  How- 
ever excellent  the  material  in  the  machine  and 
however  perfect  the  adaptation  and  adjustment  of 
its  parts,  it  can  accomplish  nothing  without  motive 
power. 

41.  The  second  phase  of  the  process  of  produc- 
tion is  concerned  with  demand.  The  production  of 
demand  is  dependent  in  many  respects  upon  the 
supply  of  commodities,  hence  the  conditions  of 
efficiency  in  the  production  of  a  supply  affect  also 
the  efficiency  of  the  development  of  demand.  There 
are,  however,  certain  other  conditions  which  require 


PRODUCTION  83 

consideration  in  this  connection  in  order  to  under- 
stand this  phase  of  the  productive  process. 

In  general  it  may  be  said  that  the  development 
of  demand  depends  upon  (1)  the  growth  of  pop- 
ulation, (2)  the  development  of  wants  and  (3) 
the  specialization  of  wants.  For  wants  to  exist  at 
all  there  must  be  people,  human  beings,  who  con- 
stitute at  the  same  time  the  want-storehouse  and 
the  want-generator.  Man  sustains  three  relations 
to  the  economic  process.  First  and  most  important 
of  all,  he  is  the  end  for  which  the  process  exists 
and  operates.  It  is  because  of  him  that  the  eco- 
nomic process  is  important.  To  him  as  the  highest, 
and  so  far  as  may  be  known,  the  ultimate  end  of 
creation,  all  else  is  subordinate.  When  viewed 
from  this  standpoint,  man  is  not  merely  an  economic 
phenomenon,  he  is  a  social  being,  endowed  with 
attributes  which,  in  the  general  judgment  of  man- 
kind in  all  ages,  pertain  not  merely  to  the  short 
span  of  human  life,  but  possess  an  eternal  signifi- 
cance. But  this  relation  of  man  to  the  economic 
process  as  its  raison  d'etre,  though  of  supreme 
importance,  is  not  his  only  relation  to  the  process. 
He  is  not  only  an  end;  he  is  also  part  of  the  means 
to  the  attainment  of  that  end. 

In  the  capacity  of  a  means  to  the  attainment  of 
the  end  of  the  economic  process,  man,  on  the  one 
hand,  embodies  two  of  the  factors  of  production, 
labor  and  enterprise,  and  on  the  other,  he  embodies 
the  wants  whose  existence  and  development  are  at 
once  the  immediate  end  of  human  activity  and'  a 


84  •        THEORY  OF  ECONOMICS 

means  for  further  development.  These  relations  of 
man  to  the  economic  process  are  by  no  means  inde- 
pendent of  each  other.  The  consequences  of  man's 
status  as  a  means  to  the  attainment  of  the  end  of 
the  economic  process  affect  so  vitally  his  status  as 
that  end,  that  the  one  can  never  safely  be  disre- 
garded in  considering  the  other.  Nevertheless,  it 
is  essential  in  seeking  the  general  truths  of  eco- 
nomic activity,  that  these  relations  should  be  clearly 
distinguished.  Bearing  in  mind,  then,  that  the 
question  here  raised  is  as  to  the  conditions  of  an 
efficient  demand,  it  is  evident  that  the  first  requisite 
is  population. 

It  was  stated  at  the  outset  that  the  exist- 
ence of  wants  as  an  essential  characteristic  of  hu- 
man nature  is  one  of  the  fundamental  hypotheses 
of  economics.  Some  wants  exist  and  are  active  in 
creating  a  demand  so  long  as  life  itself  exists.  But 
not  all  wants  exist  necessarily  with  the  existence  of 
life.  At  least,  it  does  not  follow  that  because  there 
is  life,  all  wants  exist  in  an  active  state.  It  may 
be  that  the  germs  of  all  wants  which  characterize 
the  most  advanced  development,  exist  in  the  lowest 
stage  of  life,  or  it  may  be  that  there  is  actually  the 
growth  of  new  wants  as  man  progresses.  So  far 
as  the  science  of  economics  is  concerned,  it  matters 
not  which  of  these  theories  is  accepted,  for  in  any 
event  many  human  wants  are  not  active  in  the 
lowest  stage  of  development,  but  appear  little  by 
little  as  the  wants  which  are  active  in  any  stage, 


PRODUCTION  85 

are  met.     Hence,  whatever  makes  for  the  develop- 
ment of  wants,  affects  the  efficiency  of  demand. 

Demand  as  an  economic  phenomenon  requires 
the  specialization  of  wants,  that  is  to  say,  economic 
demand  does  not  exist  simply  because  general 
wants  exist;  the  existence  of  economic  demand  re- 
quires that  the  general  wants  shall  become  special- 
ized by  being  concentrated  upon  specific  commodi- 
ties. Thus,  for  example,  the  economic  demand  for 
wheat  implies  the  existence  of  a  general  want  for 
food  and  the  concentration  of  that  want  upon 
wheat.  The  mere  indefinite  longing  for  something 
in  general  does  not  constitute  economic  demand. 
If  there  is  a  want  that  results  in  want-attracting 
power,  it  is  because  the  general  want  has  become 
centralized  upon  something  in  particular.  The 
efficiency,  then,  of  the  production  of  wealth  through 
the  development  of  demand,  depends  not  only  upon 
the  development  of  general  wants  but  also  upon 
their  specialization. 


THE  FACTORS  OF  PRODUCTION 


42.  The  factors  of  production  are  situation,  capi- 
tal, labor  and  enterprise.  Of  these,  the  first,  situa- 
tion, supplies  a  place  for  activity.  Its  necessity  to 
the  production  of  wealth  is  evident.  Not  all  pro- 
ductive processes  require  the  same  amount  of  space. 
Some,  such  as  the  raising  of  wheat  and  the  grow- 
ing of  forests,  require  a  large  area ;  others,  such  as 
the  manufacture  of  shoes  and  the  storing  of  com- 
modities, require  less ;  while  still  others  may  re- 
Walker,  Political  Economy,  §§47-98,  106-109,  303,  304; 
Ely,  Outlines  of  Economics,  Bk.  II.,  Pt.  I.,  chapters  ii.,  iii.; 
Mill,  Principles  of  Political  Economy,  Bk.  I.,  chapters 
i.-vii.,  x.,  xi.;  Marshall,  Principles  of  Economics,  Bk.  II., 
chap,  iv.,  Bk.  IV.,  chapters  ii.,  iv.-vii.,  xii.  (In  most  in- 
stances the  references  to  Marshall's  Principles  of  Economics 
apply  also  to  his  shorter  work  :  Economics  of  Industry; ) 
Gide,  Political  Economy,  trans.,  Bk.  II.,  Pt.  I.;  Laughlin, 
Elements  of  Political  Economy,  Bk.  I. ;  Roscher,  Political 
Economy,  trans.,  Bk.  I.,  chap,  i.;  Jevons,  Theory  of  Polit- 
ical Economy,  chapters  v.,  vii.;  Clark,  Philosophy  of  Wealth, 
chap,  ii.:  Theory  of  Distribution,  chapters  ix.,  x. ;  Bohm- 
Bawerk,  Positive  Theory  of  Capital,  trans.,  Bks.  I.,  II.;  Pan- 
taleoni,  Pure  Economics,  trans.,  Pt.  III.,  chap,  iii.,  §$  1,  2  ; 
Sidgwick,  Principles  of  Political  Economy,  Bk.  I.,  chap.  v. 


THE  FACTORS  OF  PRODUCTION  87 

quire  only  standing  room.  Nevertheless,  in  one 
degree  or  another,  situation  is  absolutely  necessary 
to  the  production  of  a  supply  of  commodities. 

Situation  is  usually  thought  of  in  connection  with 
land.  But  "land,"  from  one  point  of  view,  is  too 
narrow  to  designate  this  factor.  Productive  activity 
may  manifest  itself  on  the  water,  beneath  the  sur- 
face of  the  earth  or  even  conceivably  in  the  air. 
When  "land"  is  used  to  designate  this  factor  of  pro- 
duction, it  is  found  necessary  to  define  the  term  so 
as  to  include  these  possible  places  of  activity.1  On 
the  other  hand,  from  another  point  of  view,  "land" 
includes  too  much.  Associated  with  that  term  are 
soil,  wood  and  other  natural  resources.  But  these 
are  materials  for  production  and  as  such  they  differ 
from  situation  in  their  contribution  to  production. 

43.  The  efficiency  of  situation  in  the  process  of 
production  depends  upon  its  nearness  to  the  con- 
sumer. The  nearer  a  place  is  to  the  wants  that  are 
to  be  satisfied,  the  better  it  can  assist  in  minister- 
ing to  those  wants.  Thus  the  nearer  a  wheat-field 
is  to  the  market,  the  less  is  the  energy  that  must 
be  expended  in  making  the  wheat  available  to  the 
consumer.  True,  situation  is  not  the  only  factor 
that  affects  the  efficiency  of  the  process  of  produc- 
tion. Other  considerations  may  make  it  preferable 
to  raise  wheat  a  long  distance  from  the  consumer 
rather  than  utilize  a  situation  that  is  nearer.  The 
demand  for  wheat  in  England  may  under  some 
circumstances  be  met  better  by  using  the  fields  of 

1  Marshall,  Principles  of  Economics,  Vol.  I.,  p.  197. 


88  THEORY  OF  ECONOMICS 

Dakota  than  those  of  England.  But  when  this  is 
the  case,  it  is  not  because  of  the  distance  but  in 
spite  of  it.  Some  other  advantage,  such  as  superior 
fertility  of  the  soil  or  better  opportunity  of  utilizing 
efficient  machinery,  or,  frequently,  the  more  impera- 
tive need  of  the  nearer  situation  for  other  purposes, 
more  than  offset  the  disadvantage  of  distance. 

The  efficiency  of  situation,  however,  is  not  a  mere 
matter  of  physical  distance.  It  is  rather  a  question 
of  ease  of  intercourse  between  the  place  of  produc- 
tion and  the  consumer.  A  mountain  range,  though 
but  a  few  miles  in  width,  may  interpose  more 
effectual  barriers  to  intercourse  than  an  ocean  hun- 
dreds of  miles  broad.  Before  the  building  of  rail- 
roads and  the  adaptation  of  steam  to  transportation, 
Boston  and  Albany  were  further  apart  from  an  eco- 
nomic point  of  view  than  Boston  and  Savannah. 

Moreover,  the  importance  of  a  given  situation  to 
the  process  of  production  will  vary,  other  things 
being  equal,  with  the  number  of  people  it  serves 
and  their  standard  of  living,  for  the  larger  and 
more  highly  developed  the  population,  the  more 
numerous  and  extensive  are  the  wants  to  whose 
satisfaction  it  may  minister.  A  given  acre  in  a 
large  forest,  which  serves  only  as  a  hunting  ground 
for  a  small  tribe  of  Indians,  may  be  comparatively 
unimportant  to  the  process  of  production,  while  a 
few  square  feet  in  the  heart  of  a  large  city,  which 
serves  as  a  distributing  center  for  a  large  and  highly 
civilized  population,  may  be  extremely  important 
to  that  process. 


THE  FACTORS  OF  PRODUCTION  89 

Situation,  though  fixed  in  location,  is  by  no 
means  constant  in  its  efficiency  as  a  factor  of  pro- 
duction. Variations  in  population  and  changes  in 
the  facilities  for  transportation  and  communication 
affect  the  usefulness  of  any  given  situation.  The 
increase  of  population  in  the  western  part  of  the 
United  States  has  materially  increased  the  economic 
efficiency  of  situation  in  that  section.  Improved 
means  of  transportation  are  largely  responsible  for 
the  ability  of  the  Dakota  wheat  fields,  already 
mentioned,  to  minister  to  the  world's  demand  for 
wheat.  On  the  other  hand,  the  efficiency  of  some 
situation  has  been  decreased  by  migration  of  popu- 
lation and  by  improvements  in  facilities  for  trans- 
portation, which,  while  rendering  new  sections 
desirable  and  available,  have  rendered  others  com- 
paratively useless. 

44.  A  second  requisite  for  production  is  material 
out  of  which  wealth  can  be  made.  This,  as  well  as 
situation,  is  necessary  to  the  production  of  wealth. 
This  fact  is  especially  apparent  in  the  case  of  the 
production  of  such  forms  of  wealth  as  food,  cloth- 
ing, fuel  and  buildings, — commodities  so  tangible 
that  their  material  character  is  at  once  recognized. 
But  material  is  equally  indispensable  in  the  case  of 
other  and  less  tangible  commodities.  Even  the 
song  and  the  spoken  thought  are  but  air  waves 
which  convey  impressions  to  the  ear  of  the  listener.1 

The  service  rendered  by  material  to  the  produc- 

1  J.  B.  Clark,  Philosophy  of  Wealth,  p.  5. 


90  THEORY  OF  ECONOMICS 

tion  of  wealth  appears  in  many  different  forms,  for 
the  nature  of  the  wants  seeking  satisfaction  are 
numerous  and  varied.  As  land,  material  supplies  a 
foundation  upon  which  men  live  and  carry  on  their 
activities  and  a  storehouse  within  which  are  con- 
tained metals,  oil,  coal  and  other  useful  commodi- 
ties. As  soil,  also,  it  supplies  conditions  essential 
to  the  maintenance  and  propagation  of  vegetable 
life.  As  water,  it  affords  other  conditions  essential 
to  life,  both  vegetable  and  animal,  and,  in  the  form 
of  rivers,  lakes  and  oceans,  it  facilitates  intercourse 
and  supplies  a  suitable  environment  for  some  kinds 
of  animal  life.  In  still  another  form,  material  ap- 
pears as  air,  which  is  necessary  to  life,  and  consti- 
tutes a  medium  for  communicating  light  and  sound. 
Material  in  some  of  its  forms  affords  a  food  sup- 
ply and  the  so-called  ''raw  materials,"  from  which 
other  kinds  of  wealth  may  be  produced  ;  made  into 
tools,  machinery  and  buildings,  it  contributes  still 
further  to  the  satisfaction  of  wants.  The  various 
services  of  this  factor  of  production  are,  in  a  gen- 
eral way,  indicated  by  the  four  classes  into  which 
materials  are  sometimes  divided:  (1)  soil,  air  and 
water,  (2)  subsistence  fund,  (3)  raw  materials,  and 
(4)  buildings,  tools  and  machinery.  This  classifica- 
tion, though  far  from  being  scientifically  precise, 
serves  a  useful  purpose  by  way  of  description.  In 
the  ultimate  analysis,  however,  the  services  of  ma- 
terial may  be  reduced  to  one:  its  function  is  to 
provide  the  means  for  embodying  want- attracting 
power. 


THE  FACTORS  OF  PRODUCTION  91 

From  the  standpoint  of  economic  science,  mate- 
rials constitute  the  capital  fund  of  society.  This 
use  of  the  term  "capital"  should  be  carefully  dis- 
tinguished from  others  in  popular  phrase,  where  it 
is  employed  with  a  variety  of  meanings,  not  wholly 
different  perhaps,  but  lacking  scientific  precision. 
Thus  *  'capital"  is  sometimes  used  in  speaking  of  a 
bank  or  business  enterprise,  to  denote  the  original 
investment,  actual  or  nominal,  or  the  value  of  the 
plant.  The  term  is  also  used  to  designate  the  prop- 
perty  or  assets  of  an  individual  or  firm,  or  even  as 
synonymous  with  an  amount  loaned  for  which  inter- 
est is  received.  Social  capital  consists  of  the  mate- 
rials, in  whatever  form  they  may  exist,  that  are 
available  for  aiding  in  the  production  of  wealth. 

45.  The  efficiency  of  capital  in  the  process  of 
production  depends  first  of  all  upon  the  physical 
excellence  of  materials  and  their  abundance.  The 
more  nourishing  the  food,  the  more  fertile  the  soil, 
the  more  durable  the  buildings,  tools,  and  machin- 
ery, and  the  better  the  quality  of  the  raw  materials, 
the  greater  is  the  efficiency  of  these  several  forms 
of  capital  in  the  economic  process. 

The  efficiency  of  capital  varies  to  some  extent 
also  according  as  it  is  applied  to  the  immediate 
satisfaction  of  so-called  final  desires  or  is  utilized 
to  promote  the  process  of  production  in  other  ways. 
Thus,  wood  may  be  consumed  as  fuel  to  supply 
warmth,  or  it  may  serve  to  generate  steam  in  an 
engine  ;  it  may  be  used  in  the  erection  of  a  dwell- 
ing for  immediate  comfort  and  pleasure,  or  to 


92  THEORY  OF  ECONOMICS 

build  a  factory,  which  will  facilitate  the  produc- 
tion of  that  which  will  minister  to  final  desires. 

In  the  primitive  conditions  of  society,  material 
aids  to  production  consisted  chiefly  of  the  soil  and 
of  such  things  as  nature  offers  spontaneously  to 
man, — the  forest,  game,  fish,  fruit,  etc.  But  man 
soon  learned  to  adapt  the  material  at  his  disposal 
to  promote  the  satisfaction  of  wants  in  other  wrays 
than  by  its  consumption  in  the  satisfaction  of  final 
desires,  and  there  followed  the  process  of  saving 
and  capital-building.  The  result  has  been  such  a 
vast  increase  in  productive  efficiency  that  more 
and  more  the  energy  of  society  is  expended  in 
this  way.  To-day  a  large  portion  of  the  wealth 
of  society  consists  of  that  which  is  directly  in- 
tended to  aid  in  future  production.  This  char- 
acteristic of  modern  society  affords  one  of  the  most 
striking  contrasts  with  the  conditions  of  primitive 
times. 

There  is,  it  is  true,  a  limit  to  the  profitable  appli- 
cation of  energy  to  production  in  other  ways  than 
by  the  satisfaction  of  final  desires.  The  store  of 
human  energy  is  maintained  by  present  gratifica- 
tions of  wants,  and  provision  for  future  production 
which  disregards  the  necessity  of  providing  the 
requisite  human  energy  through  satisfying  present 
wants,  would  so  far  reduce  the  store  of  productive 
energy  as  to  impair  the  entire  process.  However, 
the  pressure  of  wants  demanding  immediate  satis- 
faction may  in  general  be  relied  upon  to  prevent 
such  results.  The  productive  process  is  far  more 


THE  FACTORS  OF  PRODUCTION  93 

liable  to  injury  from  too  little  than  from  too  much 
saving. 

The  efficiency  of  the  process  of  production  is 
influenced  also  by  the  relative  amounts  of  circulat- 
ing and  fixed  capital.  Economic  capital  is  called 
circulating  or  fixed  according  as,  in  the  words  of 
Mill,  it  "fulfills  the  whole  of  its  office  in  the  pro- 
duction in  which  it  is  engaged,  by  a  single  use,"  or 
exists  in  a  durable  shape,  "the  return  to  which  is 
spread  over  a  corresponding  duration."1  This  dis- 
tinction indicates  relative  rather  than  absolute 
conditions,  but  it  is  not  the  less  important.  Cir- 
culating capital  appears  in  the  shape  of  food,  fertil- 
izers, raw  materials  and  finished  products  for 
immediate  consumption;  fixed  capital  consists  of 
soil,  buildings,  tools  and  machinery.  The  greater 
durability  of  fixed  capital  enables  it  to  serve 
the  productive  process  for  a  longer  period  than 
can  circulating  capital.  This  is  in  many  re- 
spects an  advantage,  but  it  is  not  to  be  in- 
ferred that  economic  efficiency  is  to  be  promoted 
by  turning  all  the  material  possible  into 
fixed  capital.  Circulating  capital  is  equally 
important  to  the  economic  process.  While  its 
service  is  not  so  long  continued,  it  cannot  be  dis- 
pensed with.  Without  it,  fixed  capital  would  be 
useless.  Moreover,  circulating  capital  has  an  ad- 
vantage as  compared  with  fixed  capital  in  the 
adaptability  of  the  former  to  various  uses,  so  that 
there  is  less  loss  to  society  when  changes  occur  in 

1  Political  Economy,  Bk.  I.,  chap,  vi.,  §  1. 


94  THEORY  OF  ECONOMICS 

wants,  which  often  tend  to  render  fixed  capital 
comparatively  useless. 

A  definite  quantitative  statement  of  the  most 
efficient  proportionate  distribution  of  material  be- 
tween these  two  classes  of  capital  cannot  be  given. 
It  doubtless  varies  from  time  to  time.  But  it  is 
desirable  to  recognize  that  disproportionate  devel- 
opment of  either  will  impair  the  productive  process. 

46.  A  third  requisite  for  production  is  found  in 
man's  ability  to  work.  This  ability  in  its  active  state 
is  called  labor,  and  the  term  "labor"  or  "labor- 
power"  may  be  used  to  designate  this  factor  of 
production  both  in  its  active  and  in  its  passive 
state,  though  it  is  seldom  necessary  to  employ  it  in 
the  latter  sense.  Analyzed,  this  factor  of  produc- 
tion is  seen  to  consist  of  physical  strength  and  of 
intelligence.  Both  of  these  qualities  are  necessary 
to  labor,  whether  in  its  simplest  forms,  such  as  is 
employed  in  digging  a  ditch  and  in  pounding  rocks, 
or  in  its  higher  forms,  such  as  appear  in  the  con- 
struction of  delicate  machinery  and  in  the  perform- 
ance of  surgical  operations. 

But  though  physical  strength  and  intelligence 
are  essential  to  all  labor,  these  fundamental  ele- 
ments contribute  in  different  degrees  to  different 
kinds  of  labor.  This  fact  is  made  the  basis  of  a 
classification  of  labor  as  physical  and  mental  accord- 
ing as  physical  strength  or  intelligence  seems  to  be 
most  important  in  any  given  manifestation  of  labor. 
Still  another  distinction  is  occasionally  made  be- 
tween labor  and  service,  the  term  labor  being 


THE  FACTORS  OF  PRODUCTION  95 

limited  to  those  forms  of  human  activity  that  are 
expended  upon  tangible  things  and  give  tangible 
results,  while  to  other  forms  the  term  service  is  ap- 
plied. These  classifications  of  labor,  like  those  of 
capital,  though  perhaps  useful  for  descriptive  pur- 
poses, are  not  scientific.  There  is  no  definite 
dividing  line  between  physical  and  mental  labor 
nor  between  labor  and  service.  Both  "labor" 
and  service  are  labor,  and  all  labor  is  physical  and 
mental. 

47.  The  efficiency  of  labor-power  in  the  produc- 
tive process  depends  upon  the  conditions  requisite 
for  the  development  and  maintenance  of  strength 
and  intelligence.  The  most  important  of  these 
conditions  are  heredity,  nourishment,  including  en- 
vironment, and  training. 

The  extent  of  the  influence  of  heredity  upon 
labor  involves  the  question  as  to  how  far  the  char- 
acteristics of  a  parent  are  transmitted  to  its  off- 
spring. Scholars  whose  special  province  it  is  to 
investigate  this  problem,  are  not  entirely  agreed  in 
their  conclusions.  The  weight  of  opinion,  how- 
ever, favors  the  theory  that  both  physical  and  men- 
tal characteristics  are  transmitted  by  heredity. 
This  conclusion,  if  correct,  has  a  very  important 
bearing  upon  the  efficiency  of  the  productive  capac- 
ity of  society,  through  the  extent  to  which  the 
efficiency  of  any  generation  may  be  conditioned  by 
its'  ancestors,  its  productive  capacity  being  either 
maintained  and  increased  as,  in  the  perpetuation  of 
the  species,  health  and  strength  prevail,  or  impaired 


96  THEORY  OF  ECONOMICS 

and  perhaps  destroyed  as  disease  and  weakness 
predominate. 

Of  the  conditions  determining  the  efficiency  of 
labor,  the  influence  of  nourishment  is  perhaps  most 
immediately  perceptible.  Of  prime  importance  in 
this  connection  is  the  character  and  abundance  of 
the  supply  of  food  materials.  Upon  these,  exist- 
ence itself  depends.  But  the  labor  efficiency  which 
rests  upon  a  food  supply  sufficient  only  for  bare 
existence  is  of  an  extremely  low  grade.  Up  to  a 
certain  point,  there  is  a  distinct  economic  gain  to 
society  in  bettering  the  food  supply  of  the  laborers, 
for  it  results  in  a  more  than  proportional  increase 
of  labor-power.1  Moreover,  it  is  not  simply  the 
character  and  abundance  of  the  food  in  its  raw 
state  that  conditions  the  efficiency  of  labor.  The 
preparation  of  food  for  consumption  is  also  impor- 
tant. Until  a  comparatively  recent  date,  little,  if 
any,  effort  was  made  to  secure  information  as  to 
the  relative  efficiency  of  different  foods  and  the  best 
method  of  preparing  them  for  consumption.  And 
even  now  little  heed  is  given  in  practice  to  the  con- 
tributions of  science  to  this  subject. 

Closely  akin  to  food  supply  is  shelter,  including 
housing,  clothing  and  fuel,  all  of  which  are  impor- 
tant factors  in  conserving  the  energy  of  labor. 
With  these,  may  be  mentioned  also  climatic  and 
sanitary  conditions.  If  the  climate  be  too  cold  or 
too  warm,  too  moist  or  too  dry,  the  result  will  be 

1  Walker,  Political  Economy,  p.  47. 


THE  FACTORS  OF  PRODUCTION          97 

detrimental  to  labor-power.  These  conditions  are, 
however,  largely  beyond  the  control  of  man,  except 
as  he  may  be  able  to  leave  unhealthy  regions  and 
seek  localities  more  favorable  to  activity.  But  in 
so  far  as  labor  is  affected  by  sanitary  conditions, 
the  situation  is  often  of  man's  own  making.  The 
vitiating  influence  of  sweat-shops,  congested  popu- 
lation, poor  drainage,  filthy  streets  and  similar  evils 
which  sap  the  vitality  of  man,  lies  within  the 
power  of  society  to  correct.  The  removal  of  such 
abuses  is  called  for,  not  merely  on  general  human- 
itarian grounds,  but  also  in  order  that  the  present 
and  the  future  labor-power  of  society  may  not 
suffer  serious  impairment. 

In  addition  to  heredity  and  nourishment, 
training  is  important  to  the  efficiency  of  labor. 
Training  tends  to  elevate  labor  above  mere  brute 
force  and  by  the  knowledge  of  how  to  do,  adds  to 
the  efficiency  of  the  strength  to  do.  By  practice 
and  intelligent  instruction,  labor  becomes  habitu- 
ated to  certain  modes  of  activity,  thereby  facilitat- 
ing their  performance  and  releasing  energy  for 
other  activity.  Unskilled  labor  requires  superin- 
tendence, is  wasteful  of  material  and  time,  and  is 
often  incapable  of  handling  the  complicated  and 
delicate  machinery  which  contributes  so  largely  to 
the  productivity  of  modern  industry.  So  essential 
is  skilled  labor  to  efficient  industry  that  society  has 
generally  considered  it  profitable  to  take  special 
steps  to  promote  the  training  of  laborers.  Formerly 
through  apprenticeship  laws,  a  certain  time  of 


98  THEORY  OF  ECONOMICS 

preparation  and  the  making  of  a  master-piece  were 
required  as  conditions  for  entering  many  occupa- 
tions. Modern  conditions  have  led  in  large  meas- 
ure to  the  abandonment  of  the  old  apprenticeship 
system,  and  it  was  thought  for  a  while  that  ma- 
chinery would  lessen  the  need  for  skilled  labor. 
But  the  converse  has  proven  true  and  the  end 
formerly  sought  by  apprenticeship  laws  is  now 
being  realized  by  the  aid  of  technical  schools. 

The  conditions  of  efficiency  mentioned,  affect 
both  the  physical  strength  and  the  intelligence,  the 
fundamental  elements  of  labor-power.  To  intelli- 
gence as  well  as  to  physical  strength,  a  generous 
endowment  of  native  capacity,  proper  nourishment 
and  training  are  essential.  To  some  extent  these 
conditions  must  be  specially  adjusted  to  each  of 
these  elements,  but  the  fact  of  the  interdependence 
of  man's  physical  and  intellectual  nature,  renders 
it  probable  that  whatever  promotes  the  effectiveness 
of  one  will  redound  to  the  good  of  the  other. 

48.  The  fourth  factor  of  production  is  enterprise. 
It  consists  in  the  capacity  to  put  into  operation  in- 
dustrial undertakings.  It  must  not  be  confused 
with  the  so-called  labor  of  superintendence,  though 
this  form  of  activity  involves  enterprise,  as  indeed 
do  all  others  in  so  far  as  they  necessitate  inde- 
pendent initiative.  In  the  simplest  forms  of  activ- 
ity, comparatively  little  enterprise  is  needed.  To 
appropriate  food  which  lies  ready  at  hand,  requires 
but  little  effort,  and  no  one  in  a  normal  condition 
is  so  wanting  in  enterprise  as  to  be  unable  to  do  this 


THE 

Rsrrv  I 


THE  FACTORS  OF  PRODUCTION          99 

much  for  the  satisfaction  of  his  wants.  Compara- 
tively speaking,  the  enterprise  required  to  dig  a 
ditch,  to  hunt  or  to  fish  is  as  a  rule  slight.  Conse- 
quently so  long  as  industrial  undertakings  were  on 
a  small  scale,  this  requisite  for  production  did  not 
assume  any  marked  importance.  Indeed,  its  exist- 
ence as  a  distinct  factor  of  production  was  long 
unrecognized. 

To-day  all  this  is  changed.  With  the  develop- 
ment of  modern  conditions,  involving  large  under- 
takings, this  factor  appears  both  as  distinct  in  kind, 
because  performing  a  distinct  function,  and  as  of 
prime  importance  to  the  economic  process.  In 
common  phrase  it  is  often  referred  to  as  "business 
ability",  and  it  is  readily  seen  that  the  ability  to 
establish  and  operate  an  extensive  railroad  system 
or  a  manufacturing  industry  which  seeks  a  world- 
wide patronage  and  depends  for  success  upon  the 
accurate  estimate  of  wants  in  widely  separate  locali- 
ties, is  of  a  vastly  higher  order  than  the  ability 
necessary  to  run  a  local  dray  or  to  produce  vege- 
tables for  one's  self  or  for  a  local  market.  Differ- 
ences in  economic  status  to-day  result  not  so  much 
from  differences  in  opportunities  as  from  differences 
in  the  ability  to  improve  opportunity.  The  great 
success  attained  by  the  leaders  of  industry  is  due 
primarily  to  their  possession  of  a  high  grade  of 
enterprise. 

49.  The  determination  of  the  conditions  upon 
which  the  grade  of  enterprise  and,  as  a  conse- 
quence, its  efficiency  in  contributing  to  the  eco- 


100  THEORY  OF  ECONOMICS 

nomic  process,  depends,  requires  first  an  analysis 
of  man's  nature  to  discover  what  elements  therein 
constitute  the  basis  of  this  factor  of  production. 
Such  an  analysis  shows  that  the  essential  element 
of  enterprise  is  will  power.  To  possess  will  power 
is  to  possess  the  requisite  energy  for  action.  That 
which  develops  the  will  power  gives  enterprise. 
But  the  will  as  a  characteristic  of  human  nature  is 
dependent  upon  those  conditions  that  determine  hu- 
man nature, — heredity,  nourishment  and  training, 
already  discussed  in  connection  with  labor.  In  the 
case  of  labor,  these  conditions  determine  physical 
strength  and  intelligence;  in  the  case  of  enterprise, 
they  determine  will  power. 

But  economically  effective  enterprise  requires 
more  than  mere  strength  of  will ;  the  moral  char- 
acter is  also  of  great  importance.  In  the  economic 
process  many  wants  press  for  satisfaction  and  it  be- 
comes necessary  to  choose  at  any  given  time  some  one 
want  to  which  attention  shall  be  given.  Moreover, 
there  is  a  difference  in  the  effect  of  the  satisfaction 
of  different  wants  upon  economic  efficiency.  In  the 
case  of  some  wants,  such  as  the  want  for  alcoholic 
or  other  stimulants,  satisfaction  may  work  injury 
to  future  activity.  If  their  satisfaction  undermines 
the  physical  strength,  impairs  the  intelligence  or 
weakens  the  will,  the  efficiency  of  labor  and  enter- 
prise will  suffer.  And  even  when  the  satisfaction 
of  a  want  is  not  positively  detrimental,  if  it  stands 
in  the  way  of  the  satisfaction  of  a  want  more  con- 
ducive to  the  general  good,  the  result  is  an  impair- 


THE  FACTORS  OF  PRODUCTION         101 

ment  of  economic  efficiency.  Thus  the  preference 
of  present  gratification  to  future  gain  may  mean  a 
less  effective  application  of  energy.  Furthermore, 
the  satisfaction  of  some  wants  may  be  injurious 
because  inconsistent  with  the  rights  of  fellow  mem- 
bers of  society.  The  right  to  private  property,  for 
example,  is  economically  beneficial  because  it  frees 
for  other  purposes  energy  that,  in  the  absence  of 
such  a  right,  would  be  required  for  the  defense  of 
one's  possessions.  Hence  to  disregard  this  right 
and  to  steal  detracts  from  economic  efficiency. 

Much,  then,  of  the  efficiency  of  enterprise  will 
depend  upon  the  ability,  in  the  presence  of  the 
requisite  knowledge  and  physical  strength,  to  select 
from  two  or  more  possible  lines  of  action,  that 
which  is  most  conducive  to  welfare.  Herein  lies 
the  important  relation  of  the  moral  character  of  an 
individual  to  the  economic  process.  If  a  man  has 
the  necessary  labor- power,  the  extent  to  which  he 
tries  to  do  honest  work  will  materially  affect  his 
economic  efficiency.  And  the  extent  to  which  he 
seeks  to  do  honest  work  depends  directly  upon  the 
moral  quality  of  his  will  power,  the  basis  of  his 
enterprise.  The  moral  element  of  enterprise,  there- 
fore, has  an  immediate  and  positive  bearing  upon 
economic  efficiency. 

50.  The  four  factors  of  production,  situation, 
capital,  labor  and  enterprise,  may  be  called  req- 
uisites for  production,  since  their  cooperation  is 
absolutely  necessary  to  the  production  of  wealth. 
This  fact  needs  to  be  emphasized  because  in  the 


102  THEORY  OF  ECONOMICS 

looseness  of  much  current  economic  theory  the  in- 
ference is  warranted,  if  the  express  statement  is  not 
made,  that  though  these  factors  sometimes,  perhaps 
usually,  cooperate  in  the  production  of  wealth,  still 
wealth  may  be  produced  by  the  factors  acting  inde- 
pendently of  each  other  or  at  least  by  the  coopera- 
tion of  two  or  three  of  them.1  Such  a  view  rests 
upon  an  incomplete  or  an  inaccurate  analysis  of  the 
process  of  production,  or  it  results  from  the  disre- 
gard of  the  service  of  one  or  more  of  the  factors 
in  some  instances  because  of  its  apparent  insig- 
nificance. It  is  true  that  under  certain  cir- 
cumstances, the  service  of  a  factor  in  the 
production  of  wealth  may  for  practical  purposes  be 
overlooked,  but  for  scientific  purposes,  such  serv- 
ice may  be  ignored  only  when  it  is  entirely  absent. 
In  many  industrial  operations,  the  cooperation 
of  all  the  factors  is  apparent.  For  example,  in  the 
manufacture  of  cloth,  the  presence  of  each  factor 
may  readily  be  recognized  throughout  the  entire 
operation  from  the  growing  of  the  fiber  to  the 
weaving  of  the  cloth.  But  the  four  factors  are  as 
truly  necessary  for  the  production  of  other  forms 
of  wealth.  Take,  for  example,  the  forest  tree. 
The  only  requisite  for  its  production  might  seem  to 
be  situation  and  soil.  But  the  tree  is  not  wealth 
until  it  possesses  want-attracting  power.  It  can 
possess  want- attracting  power  only  when  it  is 
known  to  exist,  and  even  though  the  finding  of  the 
tree  be  accidental,  it  involves  both  labor  and  enter- 

1  Walker,  Political  Economy,  1 121. 


THE  FACTORS  OF  PRODUCTION         103 

prise.  Again,  there  are  portions  of  wealth  which 
may  seem  to  result  entirely  from  labor.  Indeed, 
one  class  of  social  reformers,  the  socialists,  base 
their  justification  of  the  proposition  to  overthrow 
the  existing  order  of  industrial  organization  upon 
the  claim  that  all  wealth  is  the  result  of  labor.1 
That  labor  is  essential  to  the  production  of  all 
wealth,  is  undoubtedly  true,  but  a  closer  look  at  the 
process  of  producing  the  wealth  which  is  ascribed 
solely  to  labor,  will  show  in  every  instance  that 
labor  has  had  the  cooperation  of  the  other  factors. 
The  presence  of  situation  will  readily  be  recognized. 
Capital  also  will  be  found  in  the  form  of  food  prod- 
ucts and  otherwise.  Nor  is  the  objection  valid  that 
food  which  is  for  consumption  should  not  be  in- 
cluded in  capital.  The  frequent  designation  of 
food  as  capital  only  until  it  comes  into  the  posses- 
sion of  a  consumer,  involves  an  arbitrary  distinction 
wholly  wanting  in  logical  consistency.  Material 
used  to  fertilize  the  soil,  it  is  said,  is  capital,  while 
material  used  to  nourish  the  body  and  maintain  its 
strength  is  not  capital.  Such  statements  are  man- 
ifestly inconsistent.  The  erroneous  theory  that 
labor,  unaided  by  the  other  factors,  can  produce 
wealth,  results  in  an  exaggerated  idea  of  the  impor- 
tance of  labor  in  production.  If  the  theory  of  the 
socialists  were  correct,  it  would  follow  that  the 
entrepreneur  is  a  social  parasite,  and  yet  labor 
without  enterprise  is  but  potential  productive 
energy. 

1  Schaffle,  Quintessence  of  Socialism,  p.  26. 


104  THEORY  OF  ECONOMICS 

Though  an  analysis  of  the  productive  process 
reveals  the  necessity  of  the  four  factors  to  the 
production  of  wealth,  it  does  not  follow  that  these 
factors  necessarily  find  manifestation  in  separate 
and  distinct  physical  forms.  There  is  never  labor 
in  action  without  enterprise,  nor,  on  the  other 
hand,  is  enterprise  ever  active  without  involving 
labor. 


THE  ECONOMIC  ORGANIZATION 


51.  The  efficiency  of  production  has  been  greatly 
increased  by  the  systematic  cooperation  of  indus- 
trial agents.  Two  men  with  a  team  and  wagon  can 
accomplish  more  than  twice  as  much  in  a  given 
time  drawing  hay,  as  can  one  man  working  alone 
with  a  horse  and  wagon.  Ten  men  engaged  in 
making  boxes  will  produce  more  if  they  cooperate 
systematically  than  if  each  man  works  by  himself. 
The  process  of  securing  the  satisfaction  of  wants  is 
less  efficient  in  a  community  where  each  family 
ministers  to  its  own  wants  entirely  than  in  one 
where  the  members  cooperate.  In  general,  it  may 
be  affirmed  as  a  valid  principle,  that  the  output  of 
a  given  number  of  productive  units  cooperating  will 
exceed  that  of  the  same  number  working  independ- 
ently. 

Walker,  Political  Economy,  \\  80-85,  408;  Ely,  Outlines 
of  Economics,  Bk.  II.,  Ft.  I.,  chapter  iii.;  Gide,  Political 
Economy,  trans.,  Bk.  II.  Pt.  II.,  chapters  i.,  ii.;  Marshall, 
Principles  of  Economics,  Bk.  IV.,  chapters  viii.-xii. ;  Laugh- 
lin,  Elements  of  Political  Economy,  chapter  vi.;  Mill, 
Principles  of  Political  Economy,  Bk.  I.,  chapters  viii.,  ix.; 
Roscher,  Political  Economy,  trans.,  Bk.  I.,  chapter  ii. 

105 


106  THEORY  OF  ECONOMICS 

This  systematic  cooperation  for  securing  the 
satisfaction  of  wants  is  the  economic  organization. 
In  many  of  its  forms  it  is  readily  recognized.  The 
making  of  wagons,  the  weaving  of  cloth,  the 
sailing  of  ships,  the  mining  of  coal,  and,  in- 
deed, most  industries,  require  the  cooperation  of 
several  for  their  successful  operation.  The  extent 
to  which  cooperation  is  applied  depends  in  part,  it 
is  true,  upon  the  character  of  the  industry,  for  not 
all  industries  are  equally  suited  to  the  application 
of  this  condition  of  economic  efficiency.  Thus 
organization  of  industry  in  farming  is  not  carried 
to  the  same  extent  as  in  a  factory.  But  though 
appearing  in  different  forms  and  in  varying  degrees 
in  different  industries,  the  cooperation  of  the  social 
units  for  the  satisfaction  of  wants  is  so  general  as 
to  be  commonly  recognized  as  a  distinguishing 
feature  of  modern  business. 

The  view  of  economic  organization,  however, 
which  sees  it  only  in  individual  enterprises,  falls 
far  short  of  comprehending  the  full  scope  of  this 
feature  of  the  economic  process,  for  the  economic 
organization  embraces  all  efforts  for  the  satisfaction 
of  wants  to  which  more  than  one  individual  con- 
tributes. The  tea  grower  in  Ceylon,  the  cotton 
planter  in  Texas,  and  the  manufacturer  of  cutlery 
in  England  are  members  of  the  same  economic 
organization  in  so  far  as  their  efforts  contribute  to 
the  mutual  satisfaction  of  wants,  just  as  truly  as 
are  the  manager,  engineer,  weaver  and  shipper  in  a 
cotton  factory.  Indeed,  the  economic  organization 


THE  ECONOMIC  ORGANIZATION       107 

is  a  complex  and  far-reaching  affair,  a  fact  that  any 
one  may  realize  for  himself,  if  he  will  but  consider 
the  extent  to  which  others,  some  known  to  him 
and  some  unknown,  have  shared  in  producing  that 
which  he  consumes.  His  clothing,  fuel,  house, 
tools,  and  in  fact  nearly  all  or  quite  all  that  minis- 
ters to  him,  represent  the  activity  of  others  as  well 
as  of  himself.  The  economic  organization  of  society 
is  coextensive  with  cooperating  human  activity. 

The  beginnings  of  this  organization  are  as  old 
as  society  itself.  As  has  been  said,  the  essen- 
tial characteristic  of  society  is  relationship,  and 
wherever  relationships  exist,  there  will  be  found 
cooperation  for  want-satisfaction.  In  primitive  times 
this  cooperation  was  doubtless  very  limited.  It 
may  have  included  but  few  human  beings,  perhaps 
only  the  members  of  a  family.  They  may  have 
cooperated  only  for  the  perpetuation  of  the  species 
and  for  common  defense.  But  they  cooperated,  and 
from  their  simple  beginnings,  in  the  course  of  time, 
has  developed  an  ever  increasing  association,  until 
to-day  the  economic  organization  is  practically 
world- wide.  And  the  importance  of  this  world- 
wide organization  of  activity  is  evidenced  by  the 
fact  that  no  nation  could  to-day  be  shut  off  from 
intercourse  with  other  nations  without  serious  im- 
pairment of  the  power  of  its  citizens  to  satisfy  their 
wants. 

52.  The  economic  organization  presents  two  dis- 
tinctive features:  division  of  function  and  unifica- 
tion of  design.  Through  the  extension  of  the 


108  THEORY  OF  ECONOMICS 

scope  and  efficiency  of  these,  the  development  of 
the  organization  has  been  realized. 

The  first  and  most  apparent  feature  of  the  eco- 
nomic organization  is  division  of  function.  This 
consists  in  the  distribution  of  the  parts  of  a  process 
among  more  or  less  distinct  agencies.  Thus  in 
making  boxes  one  man  may  cut  the  boards  into 
proper  lengths,  and  another  may  put  them  together. 
In  harvesting  wheat,  one  man  may  cut  the  grain, 
another  may  bind  it,  while  a  third  may  gather  the 
bundles,  and  perhaps  a  fourth  and  fifth  may  attend 
to  hauling  them  to  the  thresher.  Indeed,  if  the 
illustration  were  extended  to  include  all  who  share 
in  preparing  the  grain  for  consumption  as  food, 
there  would  be  added  to  those  mentioned,  the  miller 
and  the  baker,  the  machinist,  the  carrier,  and  those 
engaged  in  mining  and  lumber  industries  who  have 
aided  in  providing  the  machinery,  besides  numerous 
others.  Many  of  these  operations,  in  turn,  present 
in  themselves  an  application  of  division  of  function 
upon  an  extensive  scale.  One  may  start  with  the 
simplest  of  modern  industrial  processes  and  find  in- 
volved therein,  directly  or  indirectly,  a  large  amount 
of  division  of  function. 

The  beginnings  of  division  of  function  histori- 
cally are  lost  in  the  uncertainties  surrounding  the 
beginnings  of  society.  But  as  from  the  first  men 
have  utilized  the  principle  of  cooperation  in  seek- 
ing the  satisfaction  of  their  wants,  it  is  evident 
that  division  of  function  is  as  old  as  society  itself. 
The  early  steps  in  dividing  the  economic  process 


THE  ECONOMIC  ORGANIZATION       109 

among  the  members  of  society  were  doubtless  very 
simple.  They  probably  did  not  extend  further  than 
the  division  among  them  of  different  occupations. 
Some  hunted,  others  fished,  while  others  may  have 
made  the  implements  necessary  for  the  chase  or  for 
fishing.  This  elementary  form  of  division  of  func- 
tion has  sometimes  been  called  "division  of  occupa- 
tion" to  distinguish  it  from  the  more  extended 
application,  which  is  called  "division  of  labor,"  the 
former  consisting  in  the  differentiation  of  the 
economic  process  into  such  relatively  complete 
operations  as  are  represented  by  the  occupations  of 
the  carpenter,  the  farmer,  the  blacksmith,  and  the 
weaver,  while  the  latter  consists  in  the  further 
differentiation  of  such  occupations.  Though  this 
distinction  may  be  useful  in  calling  attention  to 
differences  in  the  extent  to  which  division  of  func- 
tion is  applied,  as  a  matter  of  fact  both  "division 
of  occupation"  and  "division  of  labor"  are  one  in 
principle. 

However  crude  the  early  manifestations  of  divis- 
ion of  function  may  have  been,  its  application  to- 
day, both  in  number  of  persons  essential  to  an 
operation  and  in  minuteness  of  subdivision  of  the 
processes,  has  reached  a  development  difficult  to 
appreciate,  unless  one  is  in  immediate  touch  with 
modern  business  organization.  The  following  are 
given  as  "distinct  branches  of  shoemaking  at  which 
men,  women,  and  children  are  kept  constantly  at 
work  in  the  most  perfect  of  the  modern  shoe  fac- 
tories;" "binders,  blockers,  bootliners,  beaters-out, 


110  THEORY  OF  ECONOMICS 

boot-turners,  bottomers,  buffers,  burnishers,  chan- 
nelers,  counter-makers,  crimpers,  cutters,  dressers, 
edge-setters,  eyeleters,  finishers,  fitters,  heelers, 
lasters,  levelers,  machine-peggers,  McKay-stitchers, 
nailers,  packers,  parters,  peggers,  pressers,  rosette- 
makers,  siders,  sand-paperers,  skinners,  stitchers, 
stringers,  treers,  trimmers,  welters,  button-hole 
makers,  clampers,  deckers,  closers,  corders,  em- 
bossers, gluers,  inner-sole  makers,  lacers,  leather 
assorters,  riveters,  rollers,  seam- rubbers,  shank- 
pressers,  shavers,  slipper-liners,  sole-leather  cut- 
ters, sole-quilters,  stampers,  stiffeners,  stock-fitters, 
strippers,  taggers,  tip-makers,  turners  and  vamp- 
ers."1  Even  the  cobbler  of  a  few  decades  ago 
would  not  recognize  some  of  these  operations.  And 
this  list  does  not  include  all  the  forms  of  activity 
essential  to  a  modern  shoe  factory,  much  less  does 
it  include  all  those  which  contribute  to  the  prepara- 
tion of  shoes  for  the  consumer. 

53.  Though  division  of  function  may  be  the  most 
apparent  feature  of  the  economic  organization,  it  is 
not  more  important  than  its  complement,  unification 
of  design.  This  consists  in  the  working  of  the 
various  parts  of  the  process  towards  a  common  end. 
It  is  not  more  important  that  the  various  functions 
of  an  organism  should  be  distributed  among  special 
organs,  than  that  those  organs  should  so  work  to- 
gether as  to  promote  a  common  end,  the  welfare  of 
the  organism.  So,  in  the  economic  organization, 

1  David  A.  Wells,  Recent  Economic  Changes,  p.  94,  note. 


THE  ECONOMIC   ORGANIZATION        111 

for  the  efficiency  of  division  of  function,  it  is  abso- 
lutely necessary  that  the  amount  and  kind  of  serv- 
ice performed  by  each  agent  should  be  such  as  to 
harmonize  with  the  activities  of  the  others  in  pro- 
moting the  common  end,  the  satisfaction  of  wants. 
It  is  not  sufficient  that  one  produce  food  and  another 
clothing.  The  satisfaction  of  wants  will  be  re- 
tarded rather  than  promoted  as  a  result  of  such 
division  of  function,  unless  each  adjust  his  actions 
to  the  wants  of  both. 

The  question  as  to  how  the  unification  of  design 
can  best  be  attained,  whether  and  to  what  extent 
by  leaving  to  each  individual  the  initiative  and  con- 
trol of  his  activity  or  by  giving  that  initiative  and 
control  to  society,  collectively,  is  one  of  the  most 
serious  of  social  problems.  The  first  requisite  for 
solving  this  problem  is  an  adequate  appreciation  of 
the  extent  to  which  economic  efficiency  depends 
upon  unification  of  design,  a  fact  which  calls  for 
the  more  emphasis  because  of  the  degree  to  which 
it  escapes  notice. 

In  individual  undertakings  and  within  limited 
areas,  one  can  see  the  importance  of  working  with 
his  fellows  to  a  common  plan.  If,  in  making  boxes, 
he  who  saws  the  lumber  disregards  the  require- 
ments as  to  length,  or  saws  too  many  of  one  length 
when  others  are  needed  to  keep  his  fellow  workmen 
occupied,  it  is  readily  seen  that  the  operation  will 
suffer.  So,  also,  as  regards  those  who  work  to- 
gether in  a  factory,  there  is  little  difficulty  in  realiz- 
ing the  necessity  of  harmonious  cooperation  in  their 


112  THEORY  OF  ECONOMICS 

work.  But  in  the  far-reaching  and  complex  rela- 
tions of  modern  industrial  activity,  the  specific 
bearing  of  one  man's  acts  and  their  ultimate  conse- 
quences are  often  quite  beyond  his  powers  of  com- 
prehension. The  cattle  herder  on  a  South  American 
ranch  can  have  no  adequate  conception  of  the  rela- 
tion of  his  activity  to  the  wants  of  those  who  will 
ultimately  consume  the  beef  and  leather  from  the 
cattle  he  is  tending.  Indeed,  the  relation  in  any 
single  instance  may  be  of  comparatively  slight  im- 
portance. Still,  no  act  that  in  any  way  affects  the 
common  end  of  satisfying  wants,  can  be  said  to  be 
wholly  without  importance.  And  upon  harmony 
of  activity  depends  in  large  measure  the  efficiency 
of  the  economic  process. 

54.  While  economic  activity  is  deliberate  in  the 
sense  that  it  is  the  result  of  the  conscious  effort  of 
man  to  satisfy  his  wants,  the  organization  of  that 
activity  lies  in  large  measure  beyond  the  immediate 
purpose  of  which  the  individual  is  conscious  in 
seeking  the  satisfaction  of  his  wants.  To  some 
extent,  it  is  true,  industry  is  organized  as  the  result 
of  deliberate  intent;  that  is  to  say,  there  are  many 
instances  in  which  the  individual  sees  the  necessity 
of  systematic  cooperation  and  seeks  to  secure  it. 
In  harvesting  crops,  in  establishing  a  cotton  factory 
or  a  railroad,  the  individual  proceeds  to  solicit  the 
assistance  of  others,  and  deliberately  organizes  the 
activity.  But  of  the  sum  total  of  organized  activity, 
of  which  an  individual  industry  is  a  part,  much  lies 
quite  beyond  the  conscious  purpose  of  the  indi- 


THE  ECONOMIC  ORGANIZATION        113 

viduals  concerned.  It  results  unconsciously  from 
the  way  in  which  individuals  seek  their  own  good. 

Division  of  function  in  economic  organization 
results  from  the  tendency  of  energy  to  seek  the 
path  of  least  resistance.  It  is  because  the  satisfac- 
tion of  wants  can  be  attained  with  less  effort  when 
the  process  is  subdivided,  that  division  of  function 
exists  and  develops.  This  tendency  leads  to  the 
selection  of  the  new  and  more  efficient  and  to  the 
rejection  of  the  old  and  less  efficient,  and  to  the 
increase  of  the  fitness  of  that  which  survives,  a 
process  already  described  as  accomplished  through 
the  complementary  working  of  competition  and 
monopolization. 

To  unification  of  design,  which  is  the  comple- 
ment of  division  of  function,  two  conditions  are 
essential.  First,  an  individual  must  be  able  to  con- 
template as  a  good  for  himself  that  which,  with  or 
without  his  knowledge,  involves  a  good  to  others. 
In  the  second  place,  so  many  as  are  necessary  to 
the  performance  of  that  which  involves  a  common 
good,  must  see  the  possibility  of  good  to  themselves 
in  the  same  direction,  t.  e.}  in  action  which  har- 
monizes. Two  men  meeting  on  the  highway  illus- 
trate these  conditions,  when  each  turns  out  to  the 
right  in  order  that  he  may  pass  the  other.  To  this 
end  it  is  necessary  that  each  should  be  capable  of 
seeing  a  possible  benefit  to  himself  by  turning  to 
one  side,  an  act  which  involves  a  benefit  to  both. 
In  addition  to  this,  both  must  see  the  possibility  of 
benefit  in  the  same  way,  i.  e.,  by  turning  to  the 


114  THEORY  OF  ECONOMICS 

right  or  to  the  left.  Otherwise,  though  recogniz- 
ing the  desirability  of  turning  out,  they  will  collide. 
Simple  as  this  act  may  be,  it  involves  all  the  ele- 
ments that  are  the  basis  of  unification  of  design 
throughout  society.  In  the  case  supposed,  the 
common  nature  of  the  good  may  be  apparent  to 
those  concerned,  though  it  may  never  enter  their 
thoughts  as  such ;  while  in  other  instances,  where 
the  parties  are  widely  separated,  each  may  contem- 
plate only  his  own  good.  But  whether  harmony  of 
action  is  conscious  or  unconscious,  it  is  due  to  the 
fact  that  men  possess  by  nature  the  capacity  to  con- 
ceive of  a  common  good  and  to  act  for  that  good.1 

55.  Three  important  advantages  result  from  the 
economic  organization :  (1)  it  makes  possible  cer- 
tain undertakings;  (2)  it  promotes  the  development 
of  productive  agencies  of  a  higher  grade  of  efficiency; 
and  (3)  it  facilitates  the  more  economical  application 
of  energy  by  existing  agencies. 

The  organization  of  activity  brings  within  the 
range  of  possibility  some  undertakings  that  would 
otherwise  be  impossible  of  accomplishment,  for  many 
things  are  beyond  the  power  of  an  individual  work- 
ing alone,  because  their  performance  requires  the 
immediate  application  of  more  energy  than  he  pos- 
sesses. This  advantage  becomes  especially  signifi- 
cant in  the  presence  of  the  stupendous  under- 

1  Cf.  Thomas  Hill  Green,  Lectures  on  the  Principles  of  Po- 
litical Obligation,  reprinted  from  his  Philosophical  Works, 
vol.  ii.,  p.  121  et  seq. 


THE  ECONOMIC  ORGANIZATION        115 

takings  of  modern  business,  in  transportation,  min- 
ing and  elsewhere.  Success  in  such  enterprises  as 
the  Suez  or  Nicaragua  canals,  the  Trans-Siberian 
and  Trans- Continental  railroads,  the  Niagara  Falls 
power  plant,  and  other  similar  industries,  is  im- 
possible without  systematic  cooperation,  if  for  no 
other  reason  than  because  they  are  too  large  for 
one  man. 

But  this  benefit  from  organization  is  not  limited 
to  operations  of  such  size.  If  in  the  transfer  of  a 
pile  of  stones  from  one  place  to  another,  some  are 
found  that  are  too  heavy  for  one  man  to  lift,  the 
performance  of  the  task  becomes  possible  only  by 
the  cooperation  of  others.  Moreover,  the  coopera- 
tion even  in  so  slight  a  matter  must  be  systematic. 
The  efforts  must  be  applied  simultaneously  and  in 
the  requisite  direction.  Few,  indeed,  are  the  in- 
dustries that  are  to-day  unaffected  by  this  advan- 
tage of  organization. 

56.  Again,  organization  promotes  the  develop- 
ment of  a  higher  grade  of  productive  agencies. 
This  appears  especially  in  connection  with  skill  and 
the  invention  of  labor-saving  devices.  The  mere 
fact  that  a  man  limits  the  range  of  his  activities 
and  concentrates  his  attention  upon  a  few  opera- 
tions tends  to  sharpen  his  faculties  and  to  increase 
his  skill  within  the  narrower  field.  A  man  makes 
a  better  blacksmith  when  he  is  not  obliged  to  divide 
his  attention  between  blacksmithing  and  farming, 
carpentering  and  other  vocations.  The  sculptor 
attains  a  higher  grade  of  skill  in  his  profession 


116  THEORY  OF  ECONOMICS 

when  not  compelled  to  combine  with  it  the  various 
other  forms  of  activity  that  are  essential  to  the 
satisfaction  of  his  wants. 

Furthermore,  the  limitation  of  the  field  of  activity 
quickens  the  inventive  genius  of  man  and  results 
in  the  introduction  of  better  tools  and  machinery 
and  in  the  discovery  of  new  possibilities  in  the 
material  at  his  disposal.  One  of  the  distinguishing 
features  of  the  present  system  of  manufactures  is 
the  extent  to  which  labor-saving  machinery  is 
employed.  The  modern  printing  press,  for  exam- 
ple, is  a  marvel  of  human  ingenuity.  Instead  of 
the  old  hand  machine,  there  is  now  a  power  press 
into  which  blank  paper  is  fed  and  out  of  which 
there  comes  a  complete  newspaper,  printed,  cut, 
pasted  and  folded,  ready  for  delivery.  Years  ago 
the  making  of  pins  was  a  laborious  process.  By 
the  close  of  the  eighteenth  century,  ten  men  could 
make  48,000  pins  in  a  day,  and  this  was  considered 
a  wonderful  triumph  of  improved  machinery.  Now 
three  men  with  the  aid  of  machinery  can  produce 
7,500,000  pins  in  a  day.1  Many  mechanical  devices 
now  in  common  use  seem  almost  human  in  the 
complexity  of  their  operations  and  more  than  hu- 
man in  the  perfection  of  their  results. 

57.  Organization  not  only  leads  to  the  development 
of  better  agencies  for  production,  but  it  also  makes 
possible  a  more  economical  application  of  existing 

1  David  A.  Wells,  Recent  Economic  Changes,  p.  59.  Read 
Chapter  2. 


THE  ECONOMIC  ORGANIZATION        117 

agencies.  This  advantage  appears,  in  one  form,  in  a 
more  extensive  utilization  of  special  facilities.  Thus, 
one  may  have  a  special  aptitude  for  mechanics,  an- 
other for  farming,  another  for  art  and  another  for 
planning  and  controlling  industries.  Organization 
enables  society  to  profit  by  these  special  aptitudes 
and  thereby  lessens  the  necessity  of  expending  energy 
on  that  for  which  one  is  but  little  fitted.  A  similar 
advantage  accrues  also  in  connection  with  commu- 
nities and  nations,  which  differ  both  in  natural  re- 
sources and  in  development.  Thus,  one  section  may 
possess  iron  and  coal,  another  may  be  especially 
suited  to  cotton-growing  and  another  to  the  pro- 
duction of  breadstuffs.  Climatic  and  other  condi- 
tions result  in  wide  differences  in  facilities  for  pro- 
duction. Tropical  vegetation  is  unlike  that  of  the 
temperate  zone,  and  both  differ  from  that  of  the 
extreme  north  or  south.  Furthermore,  nations 
exist  in  different  stages  of  economic  development. 
Some  are  especially  suited  for  the  production  of  raw 
materials,  others  for  manufacturing  those  materials 
into  products  for  final  consumption.  All  these 
differences  redound  to  the  advantage  of  society 
through  organization  of  industry,  which  makes 
possible  the  satisfaction  of  wants  from  those  sources 
of  supply  that  are  best  adapted  thereto. 

Another  form  in  which  this  advantage  appears 
is  in  the  saving  of  material  and  labor,  especially  in 
connection  with  the  concentration  of  industries  into 
large  establishments,  one  of  the  most  characteristic 
features  of  modern  business.  Many  things  that  in 


118  THEORY  OF  ECONOMICS 

small,  isolated  establishments  are  discarded  as  waste, 
not  only  failing  to  add  to,  but  actually  detracting 
from,  the  efficiency  of  production,  become  useful 
in  large  industries.  When  the  preparation  of  meat 
for  the  market  was  in  the  hands  of  small  producers, 
the  hoofs,  entrails,  horns  and  even  the  hair  and 
bones  were  commonly  thrown  away.  But  with  the 
modern  methods  of  large  packing  establishments, 
means  of  utilizing  this  waste  have  been  found  to 
such  an  extent,  it  is  said,  that  there  is  now  abso- 
lutely no  portion  of  the  animal  which  does  not  con- 
tribute some  useful  commodity.  Many  other  in- 
dustries, notably  the  refining  of  oil,  afford  similar 
evidence  of  the  gain  to  society  in  economic  efficiency 
through  the  saving  of  material. 

Labor,  too,  is  often  saved  as  a  result  of  organ- 
ization, thereby  releasing  energy  for  other  opera- 
tions. Sometimes  this  gain  appears  in  the  shorten- 
ing of  the  time  between  the  beginning  and  the 
completion  of  a  commodity.  More  often,  perhaps, 
it  is  effected  through  a  decrease  in  the  average 
time  required  to  produce  a  commodity.  Because 
of  the  number  and  complexity  of  the  different 
operations,  it  may  be  that  the  actual  time  between 
the  beginning  and  the  completion  of  a  given  pair  of 
boots  is  sometimes  longer  under  modern  methods, 
but,  considering  the  large  number  of  boots  simul- 
taneously in  course  of  production,  when  the  average 
time  required  for  making  a  pair  is  computed,  there 
will  be  found  an  immense  saving  as  compared  with 
the  old  methods.  This  advantage  of  economic  or- 


THE  ECONOMIC  ORGANIZATION       119 

ganization  appears  also  in  a  saving  in  the  time 
requisite  for  learning  an  occupation,  i.  e.,  in  short- 
ening the  term  of  apprenticeship.  Society  gains  as 
a  result  of  this,  through  the  increase  in  the  number 
of  productive  years  in  the  lives  of  its  members. 

The  saving  of  labor  appears  also  in  the  fact  that 
the  organization  of  industry  often  enables  the  same 
results  to  be  obtained  with  fewer  laborers.  Thus  it 
may  require  but  little  more  expenditure  of  energy 
to  superintend  100  men  than  50,  provided  they  are 
assembled  in  the  same  establishment  or  under  the 
same  control;  and  the  result  is  a  gain  to  society. 
This  result  of  organization  is  seen  frequently  in 
connection  with  the  consolidation  of  railroads, 
whereby  the  necessity  of  duplicating  general  officers 
is  obviated.  Another  illustration  of  a  similar  nature 
is  found  in  the  consolidation  of  different  manufactur- 
ing establishments,  thereby  saving  labor  through 
the  decrease  in  number  both  of  superintendents  and 
salesmen. 

Though  the  advantages  of  organization  appear 
in  various  forms,  they  may  be  reduced  to  one. 
They  consist  in  the  more  efficient  application  of 
energy  to  the  process  of  want- satisfaction.  Division 
of  function  contributes  to  this  end  by  the  substitu- 
tion of  more  for  less  efficient  agencies.  But  to  real- 
ize the  possible  advantages  of  these  improved 
agencies,  there  must  be  harmony  in  their  activity, 
a  unification  of  design  in  their  working.  The  serv- 
ice of  this  unification  of  design  to  the  economic 
process  may  be  described  as  consisting  in  the  de- 


120  THEORY  OF  ECONOMICS 

crease  of  friction,  whereby  energy  that  would  other- 
wise be  wasted,  is  usefully  applied. 

58.  The  advantages  resulting  from  the  organiza- 
tion of  activity  may  be  offset  to  some  extent  by 
certain  disadvantages,  for  the  organization  is  sus- 
ceptible to  certain  disorders  which  tend  to  lessen  its 
efficiency  and  give  rise  to  serious  problems.  The 
very  fact  that  machinery  is  more  complex  renders 
necessary  greater  care  that  it  does  not  get  out  of 
order.  L,oss  to  the  process  of  satisfying  wants  is 
especially  liable  from  two  causes  inseparable  from 
the  association  of  men  for  economic  ends.  In  the 
first  place,  there  is  danger  that  the  dependence 
among  the  productive  units  may  become  so  dispro- 
portionate as  to  result  in  injury  to  the  process,  and, 
in  the  second  place,  there  is  a  possibility  that  a  fail- 
ure to  adjust  the  supply  of  commodities  to  the  de- 
mand therefor,  may  lead  to  waste  through  what  is 
commonly  designated  " overproduction."  A  con- 
sideration of  these  possible  disorders  will  throw 
further  light  upon  the  nature  of  the  economic  organ- 
ization and  its  relation  to  the  economic  process. 

Division  of  function  results  in  making  the  units 
dependent  upon  each  other.  When  a  man  ceases 
to  pursue  the  entire  process  of  making  cloth- 
ing, confining  himself  exclusively  to  producing 
wool  or  to  spinning  yarn  or  to  weaving  cloth  or  to 
cutting,  sewing  and  finishing  garments,  he  becomes 
to  some  extent  dependent  upon  others  for  his  cloth- 
ing. When  a  nation  ceases  to  supply  all  that  is 
necessary  to  finished  products,  confining  itself  to 


THE  ECONOMIC  ORGANIZATION        121 

manufacturing  or  to  the  production  of  raw  mate- 
rials and  relying  upon  others  for  that  which 
it  does  not  produce,  it  becomes  to  some  extent 
dependent  upon  other  nations  for  the  satisfaction 
of  wants. 

Dependence  is  not,  however,  necessarily  an  evil. 
It  is  absolutely  inseparable  from  all  progress  and, 
when  the  development  is  healthy,  there  results  in- 
creased efficiency  and  a  higher  civilization.  But 
there  is  a  possibility  of  evil  in  the  relation  of  de- 
pendence, a  possibility  which  becomes  a  reality 
when  the  proper  balance  is  not  preserved. 

Excessive  dependence  may  be  due  to  the  fact 
that  the  process  of  division  of  function  is  carried 
so  far  as  to  diminish  the  capacity  of  an  individual, 
undermine  his  health,  stunt  his  mind  and  dis- 
tort his  development,  both  mental  and  physical. 
Such  a  result  is  most  likely  to  be  seen  where  the 
process  assigned  to  an  individual  is  a  simple, 
mechanical  one,  requiring  endless  repetition  with- 
out variation  throughout  long  hours.  The  result- 
ing decrease  in  vigor  of  mind  and  body  is  itself  an 
evil.  It  indicates  a  defeat  of  the  economic  process. 
But  this  is  not  the  only  significance  of  excessive 
dependence.  It  impairs  the  process  of  production 
by  reducing  the  efficiency  of  those  subjected  to  such 
dependence.  This  effect  becomes  especially  appar- 
ent when,  as  often  happens,  a  change  in  industry 
takes  place.  Then  the  laborer,  who  was  perhaps 
skilled  in  one  kind  of  occupation,  finds  his  training 
no  longer  in  demand,  and  if  he  is  unfitted  for  other 


122  THEORY  OF  ECONOMICS 

forms  of  work,  he  loses  employment  and  sinks  to  a 
low  state  of  economic  efficiency. 

Or,  again,  disproportionate  dependence  may  fol- 
low from  the  results  of  the  distribution  of  wealth. 
Division  of  function  necessitates  the  division  of  the 
product  among  the  producers,  and  the  conditions  of 
distribution  may  be  such  as  to  injure  the  process  of 
production.  In  the  process  of  distribution  there  is 
a  tendency  for  product  to  go  to  the  strong,  as  a  con- 
sequence of  which  the  stronger  may  become  more 
strong  and  the  weaker,  more  weak.  If  this  pro- 
motes the  survival  of  the  fittest,  it  may  not  in  the 
end  be  a  misfortune,  but  the  immediate  conse- 
quences are  often  deplorable,  and  the  extent  to 
which  remedies  are  provided  for  these  evils  is  one 
of  the  vital  tests  of  the  adequacy  of  any  industrial 
system. 

59.  A  second  evil  incident  to  economic  organiza- 
tion is  overproduction.  By  this  is  not  meant  that 
more  wealth  is  produced  than  can  be  consumed,  but 
that  there  may  at  times  be  more  of  a  commodity 
produced  than  suffices  to  meet  the  effective  demand 
for  it,  /.  e. ,  the  demand  that  is  willing  to  pay  the 
cost  of  producing  it.  When  this  happens,  it  is  an 
indication  of  loss,  for  it  means  ^hat  the  power  of 
want- attraction  which  has  been  produced  is  not 
equal  to  that  which  has  been  expended.  That  this 
is  a  matter  of  common  occurrence  is  shown  by  the 
frequency  with  which  '  'bargain  sales' '  are  instituted 
to  dispose  of  accumulations  for  which  no  effective 
demand  exists.  Such  losses  may,  however,  be  so 


THE  ECONOMIC  ORGANIZATION       123 

slight  as  to  cause  no  serious  derangement  of  the  in- 
dustrial machinery.  But  when  overproduction  takes 
place  on  a  large  scale,  it  becomes  a  serious  menace 
to  the  efficiency  of  the  economic  process. 

The  possibility  of  over-production  emphasizes  two 
important  characteristics  of  the  productive  proc- 
ess: (1)  it  is  not  a  purely  spontaneous  process  in 
the  sense  that  it  proceeds  independent  of  man's 
judgment,  hence,  (2)  the  process  becomes  increas- 
ingly speculative  as  the  organization  becomes  more 
complex.  The  further  division  of  function  is  car- 
ried, the  less  each  individual  produces  directly  for 
himself  and  the  present.  In  producing  for  others 
and  the  future,  one  is  compelled  to  form  an  estimate 
of  the  nature  and  amount  of  commodities  that  will 
be  required  by  others.  He  cannot  consult  his  own 
and  the  immediate  demand  only.  Certain  commodi- 
ties minister  to  wants  which  are  so  universal  and 
persistent  that  there  is  never  wanting  some  demand 
for  them,  but  even  in  the  case  of  these,  which  may  be 
called  '  'staple' '  commodities,  the  supply  and,  to  some 
extent,  the  demand  vary  from  year  to  year,  so  that 
judgment  as  to  what  shall  be  produced  cannot  even 
here  be  dispensed  with.  With  other  classes  of  com- 
modities which  serve  wants  peculiar  to  certain  sea- 
sons, waste  and  loss  of  efficiency  is  the  more  sure 
to  result  from  a  disregard  of  the  varying  character 
and  extent  of  demand.  The  more  susceptible  wants 
are  to  fluctuation,  the  greater  is  the  necessity  for 
care  in  adapting  supply  to  demand. 

As  an  inevitable  consequence  of  the  production 


124  THEORY  OF  ECONOMICS 

for  others  and  the  future,  the  element  of  specula- 
tion is  introduced  into  the  economic  process.  The 
same  progress  in  division  of  function  that  increases 
the  necessity  for  judgment  in  production,  intensifies 
the  uncertainty  of  the  result,  thereby  rendering 
activity  increasingly  speculative.  In  like  manner, 
variation  in  wants,  which  makes  necessary  a  care- 
ful estimate  of  future  demand,  increases  the  specu- 
lative character  of  industry.  Speculation  is,  then, 
never  absent  from  economic  activity  where  the 
cooperation  of  members  of  society  is  involved. 

Moreover,  speculation  is  not  without  its  advan- 
tages, since  it  compels  the  exercise  of  judgment 
and  contributes  to  the  development  of  a  higher 
order  of  business  ability.  Furthermore,  in  influenc- 
ing men  to  look  out  for  the  future  as  well  as  for 
the  present,  there  is  a  tendency  to  equalize 
economic  conditions,  thereby  lessening  the  evil 
effects  of  such  temporary  emergencies  as  are  caused 
by  failure  of  harvests.  But  the  possibility  of  gain, 
which  accompanies  the  existence  of  speculation, 
sometimes  leads  to  deliberate  effort  to  make  uncer- 
tainties in  order  that  one  may  profit  at  the  expense 
of  another.  The  consequence  of  this  may  be  a 
serious  disturbance  of  business,  the  correction  of 
which  is  rendered  the  more  difficult  by  the  fact  that 
it  is  not  easy  to  distinguish  the  speculation  that  is 
necessary  and  beneficial  from  that  which  is  injur- 
ious. 


THE  INCENTIVE  TO  ACTIVITY 


60.  In  addition  to  the  factors  of  production  and 
the  economic  organization,  the  character  of  the  in- 
ducement to  put  forth  effort  exerts  an  important  in- 
fluence upon  the  process  of  production.  As  has  been 
said,  the  fundamental  reason  for  activity  is  want. 
But  the  mere  existence  of  a  desire  is  not  of  itself 
sufficient  to  lead  even  to  activity,  much  less  to  the 
most  efficient  activity.  Besides  the  want,  there 
must  appear  to  the  individual  a  direct  relation  be- 
tween his  act  and  the  satisfaction  of  his  want.  He 
must  believe,  on  the  one  hand,  that  if  he  puts  forth 
effort,  he  can  attain  his  end;  and,  on  the  other 
hand,  that  if  he  does  not  exert  himself,  he  will 
suffer  a  disadvantage.  In  brief,  to  the  efficiency 
of  the  productive  process  it  is  essential  that  there 
should  be  a  prospect  (1)  that  gain  will  result  from 
action  and  (2)  that  loss  will  result  from  inaction. 

While  there  is  doubtless  much  difference  between 
the  motives  to  action,  some  men  being  impelled  by 
a  desire  for  larger  growth  and  others  seeking  only 
the  necessities  of  life,  still,  whatever  be  the  specific 
motive,  there  would  be  little,  if  any,  activity  but 

126 


126  THEORY  OF  ECONOMICS 

for  the  expectation  of  profiting  by  the  result. 
Moreover,  it  is  not  sufficient  for  efficient  production 
that  as  the  result  of  effort  there  should  be  a  pros- 
pect that  somebody's  want  will  be  satisfied,  there 
must  be  a  prospect  of  the  satisfaction  of  the  wants 
of  him  who  sets  the  process  going.  It  is  true  that 
activity  is  often  found  where  the  outlook  for  suc- 
cess seems  well-nigh  hopeless,  but  even  here  there 
will  be  found  a  belief  that  in  the  mere  fact  of 
activity  itself  is  some  prospect  of  reward, — more  at 
least  than  in  idleness. 

On  the  other  hand,  it  requires  only  a  superficial 
consideration  of  society  to  see  that  the  economic 
process  suffers  from  the  inactivity  of  those  whose 
circumstances  lead  them  to  think  that  their  wants 
will  be  supplied  without  much  activity  on  their 
part.  In  the  possession  of  an  income  which  the 
efforts  of  others  and  the  institutions  of  society  have 
provided  and  unmoved  by  ambitions  for  higher  de- 
velopment, they  contribute  but  little  to  economic 
efficiency,  because  of  the  lack  of  an  incentive  to  act. 

61.  Assuming  the  existence  of  wants,  the  condi- 
tions which  determine  the  incentives  to  activity  are 
found  largely  in  the  character  of  the  individual  and 
in  the  rights  established  by  society. 

The  incentive  essential  to  secure  efficient  action 
is  not  the  same  for  all  persons.  Differences  inher- 
ent in  human  nature  ascribable  to  temperament  and 
other  elements  of  character,  result  in  varying  de- 
grees of  natural  hopefulness.  Some  men  are  con- 
fident of  success  where  others  foresee  only  failure, 


/^v          ty>. 

/  OF  THE  \ 

f  UNIVEPSfTYi 
/ 

THE  INCENTIVE  TO  ACTIVITY          127 

for  no  other  reason  than  that  the  former  naturally 
give  greater  emphasis  to  the  favorable  side  of  things 
than  do  the  latter. 

Especially  important  in  this  connection  is  re- 
ligious faith,  which  influences  economic  efficiency 
not  only  by  conditioning  the  character  of  the  wants 
whose  satisfaction  is  sought,  but  also  by  increasing 
the  readiness  to  act.  He  who  believes  that  an  over- 
ruling Providence  controls  the  affairs  of  men,  not 
merely  watching  over  the  general  trend  of  human 
affairs,  but  concerned  also  with  the  interest  of  in- 
dividuals, rewarding  faithfulness,  feels  less  need  of 
seeing  the  end  from  the  beginning,  than  does  one 
who  is  devoid  of  such  a  faith.  And  though  hopeful- 
ness exaggerated  may  become  rashness,  and  faith 
misapplied  may  lead  to  inaction,  thereby  lessening 
the  efficiency  of  the  economic  process,  both  ele- 
ments of  character  are  important  factors  in  influenc- 
ing to  healthy  activity.  To  ignore  them  is  to  omit 
from  the  analysis  of  the  economic  process  some  of 
its  most  important  phenomena. 

62.  The  incentive  to  activity  depends  also  upon 
rights.  A  right  is  society's  recognition  of  freedom 
to  act  to  an  end,  a  recognition  involving  both  per- 
mission to  do  and  protection  in  doing.  Thus  the 
right  to  life,  the  right  to  property  and  the  right  to 
free  movement  rest  upon  society's  approval  of  the 
individual's  claim  to  freedom  to  live,  to  own  and  to 
move.  Rights  have  not  always  been  the  same. 
They  have  been  established  according  to  the  condi- 
tions existing  at  different  times  and  in  different 


128  THEORY  OF  ECONOMICS 

places.  But  always  and  everywhere  their  develop- 
ment has  had  this  distinctive  characteristic:  they 
have  been  established  according  to  society's  concep- 
tion of  the  need  of  the  individual  for  freedom  of 
action.  Their  recognition  has  brought  within  the 
reach  of  the  individual  greater  prospect  of  reward 
and  has  thereby  given  a  greater  incentive  to  activity. 

Nor  is  this  view  inconsistent  with  the  fact  that 
society's  method  of  establishing  rights  is  often  by 
denial  to  individuals  of  the  right  to  do  certain 
things.  Thus,  society  may  establish  the  right  to 
live  by  condemning  and  punishing  murder;  it  may 
establish  the  right  to  property  by  forbidding  steal- 
ing. But  in  all  such  cases,  the  real  significance  of 
society's  decrees  is  not  the  limitation  but  the  en- 
largement of  freedom.  By  preventing  one  man 
from  committing  murder  or  robbery,  it  enhances 
the  freedom  of  a  hundred  who,  as  a  result  of  those 
decrees,  can  the  more  freely  act  for  the  satisfaction 
of  their  wants.  Where  life  and  property  are  safe, 
men  are  no  longer  obliged  to  devote  a  large  portion 
of  their  energy  to  supplying  for  themselves  the 
means  of  protection.  To  that  extent  energy  is  re- 
leased for  other  purposes.  Moreover,  this  guarantee 
of  protection  vastly  increases  the  incentive  to  act 
by  increasing  the  prospect  that  one  may  enjoy  the 
fruits  of  his  efforts. 

63.  The  importance  of  rights  to  the  process  of 
satisfying  wants  will  be  more  clearly  seen  by  an 
examination  of  two  that  bear  an  especially  close 
relation  to  the  prospect  of  reward,  viz. :  the  right  to 


THE  INCENTIVE  TO  ACTIVITY         129 

own  and  the  right  to  contract.  The  right  to  own 
is,  next  to  the  right  to  live,  the  most  important 
guaranteed  to  the  individual  by  society,  because, 
while  the  latter  aims  to  insure  existence,  the  former 
aims  to  make  development  possible.  Indeed,  the 
right  to  live  in  itself  involves  the  right  to  own, 
at  least  to  the  extent  of  controlling  the  food 
without  which  life  would  cease.  True,  society, 
in  establishing  the  right  to  live,  does  not  recog- 
nize the  right  of  every  individual  under  all 
conditions  to  appropriate  whatever  is  necessary 
to  his  life,  but  as  a  social  institution  there 
must  exist,  to  some  extent,  the  right  to  own  or  men 
would  disappear  and  society  would  cease  to  exist. 
This  is,  however,  considering  the  right  to  own  from 
the  standpoint  of  absolute  necessity  only,  and  had 
mere  existence  been  the  end  sought,  the  right  to 
property  would  have  come  far  short  of  its  present 
scope.  Viewed  in  its  relation  to  production,  the 
right  to  own  is  a  fundamental  and  omnipresent 
condition  of  efficiency.  That  as  a  result  of  one's 
efforts  there  should  be  ownership  in  the  means  to 
satisfy  wants,  is  an  indispensable  requisite  to  prog- 
ress. Both  man's  immediate  efforts  and  his  dis- 
position to  save  for  the  future,  one  of  the  funda- 
mental requisites  for  capital  building,  are  dependent 
upon  property  rights. 

Of  the  rights  to  property,  the  right  to  own 
one's  self  comes  first  in  importance.  Though  slav- 
ery and  serfdom,  at  some  time  in  the  development 
of  society,  may  have  suited  the  xequirements  for 


130  THEORY  OF  ECONOMICS 

economic  efficiency,  they  are  to-day  recognized  by 
all  the  most  advanced  nations  as  utterly  incompat- 
ible with  a  high  grade  of  industry.  He  who  has 
not  property  in  himself  cannot  be  expected  to  be 
interested  in  doing  all  that  he  can  in  the  best  pos- 
sible way.  If  one  knows  that  even  his  supply  of 
life's  necessities  is  at  the  arbitrary  disposal  of  a 
master  and  that  no  matter  how  efficient  he  may  be, 
his  reward  is  wholly  at  the  pleasure  of  some  one 
else,  the  incentive  to  act  is  of  the  lowest  order.  As 
has  been  said  of  the  slavery  system,  the  individual 
under  it  has  "no  rights,"  "no  property  in  prod- 
uct, ' '  and  his  '  'pay  is  determined  by  animal  wants, ' ' 
hence  he  has  "no  interest  in  the  quantity  or  quality 
of  the  work  done  nor  in  the  care  of  materials. ' '  * 
Whenever,  under  slavery,  there  exists  a  higher 
grade  of  efficiency  than  is  needed  to  maintain  life 
and  escape  punishment,  it  will  be  found  due  to 
affection  or  to  a  sense  of  duty,  traits  of  human 
character  which  even  slavery  cannot  wholly  eradi- 
cate. So  far  as  rights  are  concerned,  the  right  to 
own  one's  self  is  the  first  condition  of  efficient 
activity. 

But  society  has  not  stopped  with  establishing 
the  right  to  property  in  one's  self.  It  has  added 
to  this  the  right  to  property  in  the  means  for  satis- 
fying wants,  a  right  that  has  varied  in  its  compre- 
hensiveness from  time  to  time  according  as  society 
has  viewed  the  needs  of  efficient  activity.  In  very 

1  Henry  C.  Adams,  Outline  of  Lectures  upon  Political 
Economy,  p.  12. 


THE  INCENTIVE   TO  ACTIVITY         131 

early  times,  it  is  not  improbable  that  the  individ- 
ual's right  to  property  was  limited  to  what  is 
known  as  personal  property,  which  then  consisted 
mainly  of  the  implements  of  the  chase  and  formed 
a  comparatively  small  part  of  the  entire  wealth  of 
society.  It  is  not  difficult  to  see  how  these  limits 
to  private  property  were  essential  at  that  time  to 
economic  efficiency.  The  principal  commodities 
sought  for  the  satisfaction  of  wants  were  wrild  ani- 
mals and  fish.  As  these  had  no  fixed  habitations, 
to  have  limited  fishing  or  hunting  grounds  for  each 
individual  to  certain  definite  areas  of  water  or  land 
would  have  rendered  existence  even  more  precari- 
ous than  it  was.  On  the  other  hand,  the  principal 
incentive  to  the  manufacture  of  good  bows  and 
arrows,  canoes  and  tents,  was  the  knowledge  that 
as  the  property  of  the  maker  they  would  contribute 
to  his  welfare. 

In  time,  the  growth  of  society  necessitated  the 
cultivation  of  land  and  with  this  came  a  limita- 
tion of  common  ownership,  looking  towards  private 
property  in  land.  In  the  system  that  prevailed  in 
the  Middle  Ages,  though  common  rights  still  ex- 
isted in  connection  with  land,  they  were  so  far  lim- 
ited as  to  entitle  the  cultivator  to  a  definite  quantity 
of  land.  And  though  this  did  not  involve  perma- 
nent possession  of  definite  pieces  of  land,  still  the 
control  of  such  definite  portions  was  vested  in  the 
cultivator  until  he  secured  his  crop.  Later,  it  be- 
came necessary  to  fertilize  the  soil  and  otherwise  to 
add  improvements  of  a  relatively  permanent  nature, 


132  THEORY  OF  ECONOMICS 

and  as  the  benefits  from  these  improvements  could 
not  be  realized  adequately  in  one  season,  longer  con- 
trol was  necessary  in  order  to  supply  the  requisite 
incentive.  Finally,  private  property  in  land  was 
established  as  a  right.  Though  other  factors 
doubtless  entered  into  the  development  of  private 
property  in  land,  those  here  given  illustrate  its 
general  character.  Indeed,  fraud  and  even  force 
may  have  been  features  of  the  actual  process  of 
development,  but  the  final  establishment  of  the 
right  to  private  property  in  land  was  due  to  the 
fact  that  society  recognized  private  ownership  as 
more  efficient  than  common  ownership  because 
there  resulted  greater  incentive  to  high  grade  culti- 
vation. 

Two  other  property  rights  bear  an  especially 
close  relation  to  the  incentive  to  activity,  the  patent- 
right  and  the  copyright,  in  the  establishment  of 
which  society  has  expressly  sought  to  offer  induce- 
ments to  efficient  effort.  The  patent-right  seeks  to 
insure  to  the  inventor  control  over  the  supply  of 
his  invention,  which  might  otherwise  be  lost 
through  the  greater  ability  of  others  to  produce  it 
after  they  had  secured  the  plan.  The  copyright 
seeks  to  secure  a  similar  advantage  to  the  author. 
The  marvelous  development  of  inventions  and  their 
vital  relation  to  industry  have  been  mentioned. 
Though,  as  has  been  pointed  out,1  the  economic 
organization  supplies  conditions  favorable  to  the 
development  of  ability  to  invent,  it  may  be  consid- 


THE  INCENTIVE   TO  ACTIVITY         133 

ered  certain  that  few  of  the  great  inventions  which 
are  revolutionizing  economic  methods  would  have 
been  made,  but  for  the  guarantee  by  society  of 
property  rights  in  such  products.  Nor  is  the  truth 
of  this  altered  by  the  fact  that  in  many  instances 
the  reward  for  an  invention  has  not  been  reaped 
by  the  inventor.  The  hope  of  such  reward  existed 
because  of  patent-rights,  and  this  gave  the  neces- 
sary incentive  to  act. 

A  similar  incentive  to  activity  is  found  in  the 
copyright,  but  for  the  existence  of  which,  many  of 
the  ablest  minds  the  world  has  seen  would  have 
been  unable  to  devote  their  energies  to  literature, 
in  which  case  society  would  have  suffered  irrevoca- 
ble loss.  Nor  is  it  in  the  realm  of  mere  culture 
alone  that  the  copyright  aids  production.  The 
general  progress  of  economic  efficiency  has  been 
due  in  no  small  degree  to  the  contributions  of 
science.  These  contributions  appear  not  only  in 
the  form  of  apparatus  and  processes  that  can  be 
patented,  but  also  in  the  form  of  scientific  treatises, 
property  in  which  is  insured  by  the  copyright. 
Fundamentally,  however,  there  is  little  difference 
between  the  so-called  patent-right  and  the  copy- 
right. Both  seek  to  encourage  activity  by  increas- 
ing the  prospect  of  reward  through  property  rights 
in  the  result. 

64.  It  is  not,  however,  to  be  inferred,  from  the 
existence  of  private  property  rights,  that  the  right 
of  control  resulting  is  absolute  and  unlimited. 
Property  rights  are  the  creation  of  society  and  it 


134  THEORY  OF  ECONOMICS 

rests  with  society  to  establish  such  limitations  as  it 
may  deem  best.  Moreover,  such  limitations  are  by 
no  means  rare.  They  are  found  in  connection  with 
the  management  of  railroads,  in  the  exercise  of  the 
right  of  eminent  domain  and  in  many  other  forms. 
Even  where  the  legal  title  to  the  ownership  of  rail- 
roads is  vested  in  private  persons,  society  insists  upon 
imposing  such  restrictions  upon  private  control  and 
even  upon  exercising  such  oversight  as  in  its  opin- 
ion public  good  demands.  These  restrictions  upon 
private  control  are  substantially  limitations  of 
property  rights,  for  from  the  standpoint  of  its 
essential  character,  if  not  in  a  technical  legal  sense, 
the  right  to  own  is  the  right  to  control. 

The  fundamental  reason  for  limitations  upon  pri- 
vate property  rights  lies  in  the  fact  that  it  is  quite 
within  the  possibilities  that  private  property  should 
at  times  so  obstruct  activity  as  to  diminish  economic 
efficiency.  Thus  the  institution  of  the  right  of  emi- 
nent domain,  whereby  society  reserves  to  itself  the 
right  to  appropriate  certain  forms  of  private  prop- 
erty for  public  use,  rests  upon  the  fundamental  fact 
that  individual  choice  as  to  the  use  of  property  may 
conflict  with  society's  conception  of  public  good. 
In  order  that  this  limitation  to  individual  control 
may  not  work  a  disadvantage  to  society,  the  right 
to  compensation  for  property  taken  for  public  use  is 
generally,  though  not  always,  recognized.  But  the 
fact  that  the  amount  of  such  compensation,  as  well 
as  the  appropriation  of  the  property  itself,  are  not 
left  to  the  decision  of  the  owner,  makes  the  right 


THE  INCENTIVE   TO  ACTIVITY         135 

of  eminent  domain  an  important  limitation  to  the 
right  of  private  property. 

To  appreciate  the  power  of  evil  in  unrestricted 
private  ownership  and  control,  one  needs  but  to 
picture  the  conditions  that  would  exist  in  the  ab- 
sence of  this  right  of  eminent  domain.  There  is 
no  more  important  requisite  for  economic  efficiency 
than  freedom  of  movement.  Freedom  of  move- 
ment, however,  requires  not  only  the  absence  of 
legal  restrictions  upon  such  movement  but  also 
routes  along  which  the  individual  may  move.  It  is 
impossible  to  estimate  the  importance  of  highways 
to  society  or  the  impediment  to  activity  that  would 
result  from  leaving  their  existence  and  location  to 
the  will  of  the  private  owner. 

Moreover,  society' s  restrictions  upon  private  prop- 
erty rights  are  not  limited  to  such  quasi-public 
undertakings  as  railroads,  nor  to  the  actual  diver- 
sion of  property  from  private  to  public  use.  In 
forbidding  a  man  to  erect  a  slaughter-house  at  will 
within  a  city's  limits,  in  requiring  of  factory  owners 
suitable  fire-escapes  and  guards  for  dangerous  ma- 
chinery and  in  other  similar  restrictions,  society 
limits  private  control  of  property.  Such  limitations, 
though  they  may  not  affect  the  legal  title,  are  in 
substance  limitations  of  private  property  rights, 
for  these,  as  has  been  said,  are,  philosophically 
speaking,  rights  of  control. 

In  various  forms,  a  desire  to  limit  still  fur- 
ther the  rights  to  private  property  is  manifested. 
The  most  extensive  of  the  schemes  proposed  is  that 


136  THEORY  OF  ECONOMICS 

of  the  socialists,  who  would  make  all  the  facilities 
for  production,  except  labor,  public  property.  In 
a  more  moderate  form,  the  same  desire  appears  in 
the  plan  of  the  single  tax  advocates,  who  would 
make  land  public  property.  Others  propose  public 
ownership  of  railroads  and  municipal  monopolies, 
such  as  water- works  and  lighting  plants.  These 
schemes  cannot  consistently  be  condemned  merely  on 
the  ground  that  they  involve  limitations  of  private 
property  rights,  for  unlimited  private  property  rights 
do  not  now  exist.  In  deciding  the  merits  of  these 
and  similar  propositions,  the  matter  of  chief  concern 
is  the  resulting  effect  upon  the  incentive  to  activity 
in  its  relation  to  the  efficiency  of  the  industry  in- 
volved and  to  the  economic  process  in  general.  For 
the  limitations  of  private  property  rights,  if  carried 
too  far,  would  diminish  the  efficiency  of  production 
(1)  by  lessening  the  incentive  that  comes  from  hope 
of  gain  and  leads  to  intense  effort;  and  (2)  by 
substituting  for  hope  of  reward  for  one's  efforts, 
hope  of  reward  without  effort  or  out  of  proportion 
to  effort.  Such  results  are  fatal  to  economic  prog- 
ress because  they  destroy  the  requisites  there- 
for. However  desirable  a  fair  distribution  of  prod- 
ucts may  be,  there  must  first  be- products  to  divide, 
and  efforts  to  secure  a  fair  distribution  which 
lessen  the  efficiency  of  production,  may  defeat 
their  own  end. 

65.  A  second  right  referred  to  as  vitally  related 
to  economic  efficiency  is  the  right  to  contract.  The 
right  to  contract  involves  freedom  to  enter  into 


THE  INCENTIVE   TO  ACTIVITY         137 

agreements  and  the  assurance  that  the  power 
of  society  can  be  relied  upon  to  secure  their 
performance.  Agreements  between  members  of 
society  are  the  direct  outcome  of  division  of 
function,  as  a  result  of  which  men  produce  less  for 
themselves  directly  and  for  the  present,  and  more 
for  others  and  the  future.  Under  such  conditions, 
agreements  as  to  future  performance  are  a  prereq- 
uisite for  present  action.  But  the  individual  un- 
aided can  with  difficulty  compel  the  fulfillment  of 
obligations.  The  weak  would  be  at  the  mercy  of 
the  strong,  were  it  not  for  the  superior  power  of 
society  which  can  be  invoked  when  necessary. 
Wherever  one's  prospect  of  reward  depends  at 
all  upon  the  obligations  of  others,  an  -adequate 
incentive  to  act  cannot  rest  merely  upon  the 
willingness  of  the  others  to  do  their  part. 
Moreover,  under  the  existing  order  of  things, 
there  are  few  instances  in  which  one's  efforts  to 
satisfy  his  wants  do  not  depend  in  some  degree 
upon  others  for  their  success.  Society' s  recognition 
and  enforcement  of  contracts  tend  to  insure  to  the 
laborer  the  returns  agreed  upon  for  his  services; 
they  make  possible  the  flow  of  capital  through 
loans  to  the  place  where  it  can  be  most  efficiently 
used;  and,  as  an  accompanying  result,  they  enable 
the  collection  and  more  efficient  utilization  of  small 
savings,  thus  diminishing  loss  through  waste. 

The  importance  of  contracts  to  production  is  en- 
hanced by  the  extent  to  which  under  modern  econ- 
omic conditions,  the  owners  of  the  factors  of  produc- 


138  THEORY  OF  ECONOMICS 

tion  do  not  come  into  immediate  control  of  the  prod- 
uct. When  the  owners  of  capital,  situation  and  la- 
bor are  not  themselves  managers  of  an  undertaking, 
they  must  rely  upon  others  for  their  returns  from 
the  industry.  The  finished  product  comes  into  the 
immediate  control  of  the  proprietor  of  the  industry 
and  contracts  are  necessary  to  insure  its  proper  dis- 
tribution. In  a  shoe  factory,  for  example,  the 
plant,  raw  materials  and  labor  may  be  owned  by 
others  than  the  proprietor.  His  ability  to  obtain 
the  use  of  these  factors  will  depend  in  no  small 
degree  upon  contract,  for  the  finished  shoes  come 
into  his  immediate  possession,  and  however  honest 
he  may  be,  the  owners  of  the  factors  will  expect  an 
agreement,  enforceable  at  law,  before  allowing  the 
use  of  their  property.  The  conditions  are  further 
complicated  by  the  fact  that  the  finished  product  is 
often  not  suited  for  the  payment  of  the  owners  of 
the  factors  of  production.  The  owners  of  the  plant, 
of  the  materials  and  of  the  labor  do  not  want  their 
pay  in  shoes.  The  proprietor  is  expected  to  sell 
the  shoes  upon  the  market  and  to  pay  his  obliga- 
tions in  a  medium  of  exchange.  In  every  step  of 
the  process,  contracts  enter,  and  their  status  is  an 
important  condition  of  efficiency. 

The  close  relation  of  contracts  to  economic  effi- 
ciency is  seen  also  in  connection  with  the  use  of 
credit  in  the  process  of  buying  and  selling.  The 
development  and  usefulness  of  division  of  function 
require  an  exchange  of  commodities,  and  to  facili- 
tate exchange  it  has  been  found  necessary  to  em- 


THE  INCENTIVE   TO  ACTIVITY         139 

ploy  credit.  Indeed,  the  vast  majority  of  business 
transactions  are  conducted  without  the  actual  trans- 
fer of  money.  At  the  very  foundation  of  credit  is  the 
inviolability  of  contracts.  Not  sentiment,  nor  per- 
sonal friendship,  but  legally  enforceable  agreements 
are  the  basis  of  business  credit,  and  no  highly  de- 
veloped credit  system  can  be  found  where  the  insti- 
tution of  contract  is  not  well  established. 

So  important  does  society  regard  the  matter  of 
contracts,  that  it  often  allows  an  obligation  to  be  im- 
plied in  the  absence  of  express  agreement.  Thus, 
"if  a  person  continues  to  receive  a  paper  or  periodi- 
cal sent  through  the  post-office,  he  is  liable  for  the 
subscription  price."1  His  acceptance  of  the  paper 
implies  an  agreement  to  pay  for  it.  It  is  held  also 
that  a  "common  carrier  intrusted  with  goods  im- 
pliedly  promises  to  carry  and  deliver  them  safely."2 
It  is  stated  as  a  general  rule,  that  "a  promise  will 
be  implied  or  created  by  law  where  equity  or  good 
conscience  require  one,  even  though  none  were 
especially  made. ' '  Ample  warrant  for  society' s  con- 
cern as  to  contracts  is  found  in  their  vital  relation 
to  that  prospect  of  reward  which  is  essential  to 
efficient  activity. 

Society  places  limitations  upon  the  right  to 
contract,  as  it  does  upon  property  rights,  be- 
cause of  the  evils  which  might  otherwise  result.  It 
is  to  the  interest  of  society  that  both  parties  to  a 
contract  should  be  as  free  as  possible,  or  at  least 

1  Lawson,  Contracts.     Sec.  43.        2  Ibid.,  Sec.  49. 


140  THEORY  OF  ECONOMICS 

that  neither  should  be  under  any  other  compulsion 
than  such  as  makes  for  his  good.  Hence  in  a  large 
number  of  instances,  undue  influence  is  held  to  be 
sufficient  ground  for  invalidating  a  contract.1  Thus 
a  contract  whereby  an  employee  releases  his  em- 
ployer from  liability  in  case  of  injury  is  often  held 
to  be  void.  Furthermore,  many  contracts  in  re- 
straint of  trade,  though  freely  entered  into  by  the 
parties,  are  declared  illegal  because  considered  to  be 
against  public  interest.2  As  a  general  principle, 
society  no  longer  enforces  the  actual  fulfillment  of 
contracts  involving  personal  performance,  for  such 
a  policy  would  be  too  akin  to  slavery  to  be  consist- 
ent with  society's  good.  In  all  these  cases,  as 
with  property  rights,  the  demands  of  economic 
efficiency  will  be  found  upon  analysis,  to  be  a  deter- 
mining factor  in  settling  the  limits  to  the  right  to 
contract. 

66.  Closely  akin  to  the  right  to  contract  but  so 
important  as  to  justify  special  consideration,  are 
the  rights  through  which  society  seeks  to  increase 
the  incentive  to  activity  by  directly  limiting  liability 
to  loss.  With  the  progress  of  society,  the  individ- 
ual tends  more  and  more  to  share  with  others  the 
control  of  the  conditions  of  his  success.  This,  as 
has  been  seen,  is  a  direct  result  of  division  of  func- 
tion and  leads  to  the  dependence  of  members  of 
society  upon  each  other.  Under  these  conditions, 

1  Lawson,  Contracts,  Sec.  259  et  seq. 

2  Ibid.,  Sec.  324  et  seq.     An  excellent  statement  of  the 
social  status  of  contracts  can  be  found  in  this  treatise. 


THE  INCENTIVE    TO  ACTIVITY         141 

there  is  a  tendency  to  seek  the  increase  of  the  pros- 
pect of  reward  by  guaranteeing  the  individual 
against  the  full  consequences  of  his  failure  to  suc- 
ceed, thereby  diffusing  responsibility.  Thus  society 
authorizes  associations  in  which  the  liability  of 
each  member  of  the  organization  is  limited,  usually 
to  some  proportion  of  his  share  therein. 

Limited  liability  is  one  of  the  prominent  features 
of  joint-stock  companies  and  corporations.1  In 
these  companies  the  management  is  placed  in  the 
hands  of  agents,  who  may  or  may  not  be  part  own- 
ers, and  upon  their  judgment  the  success  or  failure 
of  the  undertaking  largely  depends.  In  many  cases 
the  risk  involved  is  so  great  that  the  industry  would 
not  be  undertaken  if  each  one  joining  therein  were 
to  be  held  liable  for  the  entire  loss  in  case  of  failure. 
But  men  are  willing  to  share  in  such  associations, 
even  though  not  personally  in  control  of  their  con- 
duct, because  of  the  possible  advantage  in  case  of 
success  and  of  the  limited  liability  to  loss  in  case  of 
failure.  This  form  of  business  organization,  origin- 
ally necessitated  by  the  exigencies  of  large  under- 
takings, has  proven  so  advantageous  to  the  par- 
ticipants, that  many  small  establishments  have  re- 
organized as  stock  companies. 

The  advantages  to  society  of  such  a  method  of 
organization  are  very  great  and  should  not  be  lost 
sight  of  in  the  presence  of  the  evils  to  which 


term  "corporation"  strictly  speaking  includes  mu- 
nicipalities and  many  religious  and  social  organizations  as 
well  as  those  established  for  business  purposes. 


142  THEORY  OF  ECONOMICS 

it  is  susceptible.  Corporations  enable  society  to 
profit  by  the  superior  possibilities  of  large  busi- 
ness enterprises  without  the  loss  in  incentive  to  act 
which  would  result,  were  all  industries  that  are  too 
large  for  a  single  individual,  to  be  placed  in  charge 
of  the  state.  But  corporate  organization  in  foster- 
ing large  industries  promotes  concentration  of 
power  of  control  and  hence  may  be  lead  to  the 
evil  possibilities  of  monopolization.  And,  in  estab- 
lishing the  right  to  engage  in  business  with 
a  limited  liability  as  to  the  consequences  of 
one's  acts,  society  owes  it  to  itself  to  guard 
against  the  abuse  of  this  privilege.  In  some  re- 
spects this  is  one  of  the  most  pressing  of  social 
problems.  Many  of  the  evils  ascribed  to  monopoli- 
zation are  due  to  defective  corporation  laws.  But 
in  correcting  these  evils,  great  care  should  be  taken 
not  to  allow  a  rash  judgment  as  to  the  results  of 
corporate  organization  to  obscure  the  important 
advantages  accruing  to  society  therefrom. 

Somewhat  similar  to  the  limited  liability  of  cor- 
porations, in  that  it  limits  one's  liability  to  suffer 
the  complete  consequences  of  failure,  is  the  institu- 
tion of  old  age  pensions.  Under  modern  economic 
conditions  many  men  are  compelled  to  rely  solely 
upon  their  own  labor  to  secure  the  satisfaction  of 
wants,  as  a  result  of  which,  members  of  this  class 
at  times  fail  to  make  adequate  provision  for 
old  age.  It  is  believed  by  some  that  this  failure  is 
not  primarily  the  fault  of  the  persons  concerned  but 
is  due  in  part  to  modern  industrial  organization. 


THE  INCENTIVE   TO  ACTIVITY         143 

This  belief  has  led  to  the  establishment,  in  some 
countries,  of  old  age  pensions  for  the  workingmen, 
which,  by  a  guarantee  against  future  need,  tend  to 
relieve  workingmen  from  undue  anxiety.  In  their 
relation  to  the  incentive  to  activity,  these  pensions 
are  in  substance  attempts  to  avoid  loss  of  efficiency 
through  despair.  Fear  of  loss  is  but  the  opposite 
of  hope  of  gain,  and  however  they  may  differ  in 
their  effects  upon  individuals,  their  results  agree  in 
in  this:  that  excessive  hope  of  reward  which  be- 
comes rashness,  and  excessive  fear  of  loss  which 
becomes  despair,  are  alike  injurious  to  the  produc- 
tive process. 

As  social  problems,  the  detailed  discussion  of 
corporations  and  pensions  lies  outside  the  scope  of 
the  present  investigation.  Nor  do  the  rights  of 
property,  of  contract,  of  corporate  organization 
and  of  pensions,  exhaust  the  social  institutions 
which  affect  economic  efficiency.  They  may,  how- 
ever, be  considered  sufficient  to  illustrate  and  empha- 
size the  close  connection  between  the  legal  institu- 
tions of  society  and  the  incentive  to  activity  which 
is  essential  to  efficient  production. 


THE  DEVELOPMENT  OF  DEMAND 


67.  The  first  requisite  for  economic  demand  is 
population,1  and  except  when  the  increase  in  popu- 
lation so  far  exceeds  the  increase  in  commodities  as 
to  lower  the  standard  of  living,  it  may  be  said  that 
the  larger  the  population  the  more  effective  is  the 
demand  for  commodities.  The  extent  of  popula- 
tion depends  primarily  upon  the  procreative  capac- 
ity of  the  race,  a  question  that  is  physiological  in 
character.  But  a  high  birth-rate  does  not  neces- 
sarily result  in  a  numerous  population.  The  tend- 
ency of  population  to  increase  as  a  result  of  births 
is  in  some  measure  offset  by  its  decrease  through 
deaths.  And  though  death  is  certain  for  all  human 
beings,  its  influence  is  increased  by  the  numerous 
causes  which  prevent  many  from  attaining  what 
may  be  called  a  normal  age.  Only  a  small  propor- 
tion of  men  die  as  the  result  of  the  natural  decay 
of  physical  energy  through  old  age.  Disease,  acci- 
dent, war,  pestilence  and  crime,  in  a  multitude  of 

1  Throughout  this  discussion  of  demand,  the  existence  of 
commodities  is  assumed. 

144 


THE  DEVELOPMENT  OF  DEMAND      145 

forms,   shorten  the  normal  period  of  life  and  tend 
to  depopulation. 

The  fact  of  the  necessity  of  a  large  population 
to  a  high  grade  of  economic  progress,  both  as 
affording  the  necessary  labor  power  and  enterprise 
and  also  as  supplying  that  variety  and  extent  of 
demand  without  which  the  scope  and  efficiency  of 
activity  must  remain  limited,  has  been  obscured  by 
the  emphasis  given,  since  the  time  of  Mai  thus,  to 
the  possible  evils  of  over-population.  Mai  thus 
pointed  out  the  fact  that:  "There  resides  in  nearly 
all  races  and  tribes  of  men,  a  strong,  urgent,  per- 
sistent disposition  to  carry  the  increase  of  popula- 
tion beyond  the  limits  of  adequate  subsistence." 
It  is,  of  course,  impossible  that  population  should 
continue  to  increase  faster  than  subsistence,  because 
without  adequate  subsistence,  the  death-rate  would 
offset  the  birth-rate.  But  it  is  conceivable  that 
population  should  increase  to  the  limit  of  bare  sub- 
sistence, in  which  case  mankind  would  be  con- 
stantly on  the  verge  of  starvation.  This  question 
of  the  possibility  of  over-population  and  the  prope 
remedy  therefor  belongs  to  the  discussion  of  social 
problems.  It  has,  however,  an  important  bearing 
upon  the  present  inquiry,  in  that  it  suggests  the 
fact  that  the  efficiency  of  demand  depends  not 
merely  upon  the  number  of  people  but  also  upon 
their  standard  of  living. 

68.  The  standard  of  living  attained  by  a  people 

1  Walker,  Political  Economy,  p.  313. 


146  THEORY  OF  ECONOMICS 

is  conditioned  by  the  extent  and  character  of  the 
development  of  wants.  The  fundamental  charac- 
teristic of  the  development  of  wants  is  the  fact  that 
new  wants  arise  through  the  satisfaction  of  existing 
wants.  Wants  satisfied  beget  other  wants,  or  bet- 
ter, perhaps,  wants  satisfied  enable  other  wants 
relatively  less  intense  to  assert  themselves.  The 
process  of  development  is  from  the  general  to  the 
particular.  First  there  exists  a  general  want,  per- 
haps unexpressed,  either  unsatisfied  or  capable  of 
better  satisfaction;  then  a  commodity  is  found 
which  will  meet  the  want,  after  which  the  want 
turns  to  the  specific  object  and  there  results  eco- 
nomic demand.  To  illustrate  in  the  case  of  cotton- 
seed, already  mentioned,  there  existed  first  the 
general  want  for  a  better  food  supply  ;  then  it  was 
found  that  cotton-seed  would  meet  this  want,  and 
the  want  turned  to  the  specific  object;  there  arose 
a  demand  for  cotton-seed  and  its  products.  A  sim- 
ilar illustration  is  found  in  the  case  of  the  tomato, 
which  now  contributes  so  extensively  to  the  food 
supply.  Formerly  this  ministered  only  to  a  lim- 
ited aesthetic  demand.  It  was  cultivated  as  a 
garden  ornament.  But  it  became  known  that  it 
was  good  to  eat,  and  a  portion  of  that  general 
demand  for  a  better  food  supply,  which  is  always 
pressing  for  satisfaction,  became  centered  upon 
tomatoes. 

It  should  be  noted  also  that  a  vital  relation  ex- 
ists between  effort  and  the  development  of  wants. 
By  this  is  meant  not  merely  that  effort  is  necessary 


DEVELOPMENT  OF  DEMAND       147 


to  secure  that  which  will  satisfy  wants  and  hence 
to  the  development  of  new  wants,  but  that  to  some 
extent  effort  is  a  direct  cause  of  the  development  of 
wants,  and  is,  therefore,  economically  useful  in  and 
of  itself.  A  condition  in  which  wants  could  be 
satisfied  without  effort  is  as  undesirable  as  it  is 
impossible. 

The  relation  between  eifort  and  development  can 
be  described  only  in  general  terms  and  is  not  sus- 
ceptible of  quantitative  determination.  It  is  subject 
to  great  variations,  because  it  is  dependent  upon  a 
variety  of  conditions.  It  is  not  to  be  inferred 
that,  because  some  effort  is  desirable,  therefore 
the  greater  the  effort  necessary  to  the  satis- 
faction of  wants,  the  better.  Too  great  effort 
means  exhaustion.  But  it  would  be  equally  erro- 
neous to  affirm  that  the  less  the  effort  the  better, 
for  too  little  effort  means  stagnation.  It  is  not  an 
accident  that  the  highest  development  has  been 
attained  in  the  temperate  ratherthan  in  the  torrid 
zone  where  nature  is  so  generous  that  the  necessi- 
ties of  life  require  only  ta  be  appropriated,  or  in  the 
frigid  zone  where  the  conditions  are  so  hard  that 
it  requires  nearly  all  of  one's  effort  to  maintain 
existence.  Nor  does  the  fact  that  so  much  activity 
in  industry  is  devoted  to  decreasing  the  cost  of  pro- 
duction disprove  the  statement  that  effort  is  in  itself 
to  some  extent  useful.  Whatever  may  be  the  spe- 
cific motive  of  him  who  seeks  to  make  the  condi- 
tions of  satisfying  wants  easier,  the  result  of  the 
attainment  of  this  end  is  not  idleness.  In  its  rela- 


148  THEORY  OF  ECONOMICS 

tion  to  the  economic  process,  the  attempt  to  de- 
crease the  cost  of  production  is  not  an  effort  to 
attain  rest,  but  rather  a  striving  to  save  energy  in 
one  direction  that  it  may  be  available  in  some 
other,  i.  e. ,  it  is  struggle  for  higher  development. 

Wants  develop,  then,  through  the  satisfac- 
tion of  wants,  i.  e.,  through  consumption.  But 
not  all  wants  sustain  the  same  relation  to  efficiency 
of  demand.  It  is  not  merely  the  general  fact  of 
want-development  but  the  kind  of  want-develop- 
ment also  that  conditions  demand.  An  analysis  of 
the  character  of  wants  is  necessary,  then,  to  deter- 
mine the  relation  of  consumption  to  demand.  The 
subject  of  inquiry  here  presented  has  usually  been 
ignored  in  the  investigation  of  economic  principles, 
on  the  ground  that  it  pertains  only  to  the  domain 
of  the  moralist  or  the  sociologist.  Because  the 
satisfaction  of  wants  is  the  end  of  activity,  it 
seems  not  to  be  sufficiently  recognized  that  this 
end  becomes  also  a  means,  hence  the  satisfaction  of 
wants  must  itself  be  taken  into  account  in  deter- 
mining the  conditions  of  economic  efficiency. 

Furthermore,  it  is  too  often  assumed  that  the 
nature  of  demand  itself  need  not  be  taken  into 
consideration,  and  that  the  economist  should  con- 
cern himself  only  with  an  analysis  of  the  way 
in  which  demand  is  met.  This  is,  however, 
to  ignore  an  important  phase  of  the  economic 
process  and  to  leave  the  resulting  presenta- 
tion of  principles  incomplete.  It  should  be  ob- 
served also  that  though  the  investigation  here 


THE  DEVELOPMENT  OF  DEMAND       149 

approaches  the  domain  of  ethics,  the  point  of  view 
is  different.  It  is  not  proposed  to  inquire  into  the 
right  and  wrong  of  different  wants,  but  into  their 
varying  effect  upon  economic  efficiency  in  so  far  as 
that  depends  upon  demand.  The  ethicist  may  hold 
that  this  determines  the  right  or  wrong  character 
of  wants  and  of  the  resulting  activity,  i.  <?.,  that 
whatever  ministers  to  human  development  is  right 
and  that  whatever  retards  it,  is  wrong.  With  this, 
however,  the  economist,  in  so  far  as  he  seeks  funda- 
mental economic  principles,  is  not  concerned.  For 
with  him  the  sole  question  in  this  connection  is, 
how  do  wants  affect  the  efficiency  of  demand. 

69.  The  chief  characteristics  of  wants  that  con- 
dition their  influence  upon  demand  are  (1)  persist- 
ence, (2)  expansibility  and  (3)  healthfulness.  The 
more  persistent  wants  are,  the  more  effective  is  the 
resulting  demand,  unless  some  other  characteristic 
renders  them  destructive.  For  the  greater  the  per- 
sistence of  wants,  the  more  effective  are  they  in  im- 
pelling to  action  for  their  satisfaction,  and  the  more 
certain  is  it  that  the  supply  adapted  to  the  wants 
and  the  adjustment  of  economic  forces  for  the  pro- 
duction of  that  supply,  will  continue  effective.  This 
is  the  characteristic  popularly  called  "steadiness." 
A  steady  demand  diminishes  the  uncertanties  of 
business,  decreases  the  speculative  character  of 
undertakings,  and  limits  the  field  of  the  unscru- 
pulous member  of  society. 

The  recognition  of  the  fact  that  wants  vary  in 
the  degree  of  their  persistence  is  reflected  in  the 


150  THEORY  OF  ECONOMICS 

popular  classification  of  commodities  as  necessities, 
comforts  and  luxuries.  It  is  impossible  to  draw 
hard  and  fast  lines  between  commodities  on  this 
basis  of  classification,  but  it  corresponds  in  general 
with  the  fact  that  some  wants  are  in  the  highest 
degree  persistent,  because  suffering  and  death  result, 
if  they  remain  unsatisfied;  others  are  less  persistent, 
because  their  satisfaction  is  only  a  matter  of  con- 
venience; while  others  are  still  less  persistent  be- 
cause concerned  only  with  pleasure.  But  suffering, 
convenience  and  pleasure,  like  necessities,  com- 
forts and  luxuries,  are  purely  relative.  That  wyhich 
ministers  to  the  convenience  of  one,  may  prevent 
positive  suffering  in  another;  while  that  which  is 
merely  a  matter  of  pleasure  to  one,  is  often  essential 
to  the  convenience  of  another. 

The  persistence  of  wants  depends  largely  upon 
the  physical  nature  of  individuals  and  upon 
habit.  Some  things  minister  to  the  continuance  of 
physical  existence;  these  are  necessities  in  the 
strictest  use  of  the  term.  The  demand  for  such 
commodities  is  fundamental  and  is  found  in  all 
stages  of  development.  Under  existing  conditions, 
it  is  the  most  potent  influence  impelling  to  activity. 
In  some  instances,  it  alone  prevents  absolute  idle- 
ness. But  where  these  wants  only  are  found,  the 
standard  of  living  is  of  the  lowest  sort.  Above  it 
are  standards  of  all  grades  up  to  the  highest,  which 
must  continue  to  move  still  higher,  if  civilization  is 
to  continue  to  advance. 

These  standards  and  the  persistence  of  the  accom- 


THE  DEVELOPMENT  OF  DEMAND       151 

panying  wants  are  largely  influenced  by  habit.  The 
want  which  appears  at  first  incidentally  and  appar- 
ently, it  may  be,  by  accident,  once  gratified,  recurs 
to  seek  new  satisfaction.  At  each  new  recurrence, 
there  is  a  tendency  to  increased  persistence  until  a 
habit  is  formed  and  an  element  in  the  standard  of 
living  becomes  fixed. 

70.  A  second  characteristic  of  wants  that  in- 
fluences demand,  is  expansibility.  Taking  wants  as 
a  whole,  it  may  be  said  that  their  capacity  for 
development  is  indefinitely  great.  This  is  a  result 
of  the  nature  of  man,  and  its  bearing  upon  the  eco- 
nomic process  is  very  significant.  It  forbids  a  con- 
templation of  the  time  when,  even  though  pop- 
ulation should  no  longer  increase,  a  fixed  condi- 
tion of  want-development  will  be  attained.  The 
complete  and  final  satisfaction  of  wants  is  impossi- 
ble even  though  the  supply  of  commodities  avail- 
able at  a  given  time  sufficed  to  meet  all  the  wants 
then  active.  Certain  wants  recur  at  more  or  less 
frequent  intervals,  as  in  the  case  of  the  wants  for 
food,  clothing  and  fuel.  Hence,  though  these  were 
completely  satisfied  at  a  given  time,  such  satis- 
faction would  not  be  final.  But,  not  only  do  cer- 
tain wants  require  repeated  satisfaction,  it  is  also 
true  that  new  wants  are  constantly  appearing.  And 
judging  from  experience,  the  conclusion  is  war- 
ranted that  there  is  no  end  to  the  capacity  of  man- 
kind to  develop  wants.  In  other  words,  it  can  never 
be  predicated  that  existing  wants  can  be  no  better 
satisfied  and  that  no  new  wants  can  appear.  The 


152  THEORY  OF  ECONOMICS 

expansibility  of  wants  makes  for  the  efficiency  of 
demand, 

Not  all  wants,  however,  are  alike  in  their  expan- 
sibility, and  in  this  fact,  as  well  as  in  the  varying 
persistence  of  wants,  is  a  cause  of  difference  in  the 
effect  of  wants  upon  demand.  The  fact  of  differ- 
ences in  the  expansibility  of  wants  has  not,  as  a 
rule,  been  considered  of  sufficient  significance  to  be 
recognized  in  economic  discussions.  This  is  due 
not  only  to  a  belief  that  demand  can  and  will  take 
care  of  itself,  but  also  to  the  concentration  of  atten- 
tion in  matters  pertaining  to  economics,  upon  the 
physical  wants  and  the  commodities  ministering 
thereto.  In  general,  the  physical  wants,  though 
more  persistent,  are  less  expansible  than  the 
non-physical  or,  as  they  may  be  termed,  spirit- 
ual wants.  The  want  for  food,  in  so  far  as  it  arises 
from  the  requirements  for  maintaining  life,  does  not 
vary  greatly  in  amount  for  each  individual  from  age 
to  age.  The  want  for  clothing,  fuel  and  shelter,  in 
so  far  as  those  commodities  are  necessary  as  a  pre- 
ventive of  physical  suffering,  has  increased  to  some 
extent  because  of  changed  habits  of  life;  certain 
forms  of  activity  lessen  the  hardiness  of  the  body 
and  increase  the  requirements  for  protection  from 
cold.  In  the  main,  however,  the  large  possibilities 
of  development  are  found  in  the  domain  of  the 
spiritual  wants,  such  as  the  desire  for  esteem, 
knowledge,  power  and  the  beautiful.  These  are 
the  wants  whose  expansibility  leads  to  the  great  in- 
crease in  demand.  Even  where  the  increase  in  de- 
mand calls  for  more  elaborate  and  expensive  food, 


THE  DEVELOPMENT  OF  DEMAND       153 

it  is  chiefly  due  to  the  addition  of  the  spiritual 
to  the  physical  element  of  wants.  Where  an  in- 
dividual spends  large  sums  of  money  upon  clothing, 
it  is  due  not  so  much  to  a  desire  for  warmth  as  to  a 
desire  to  conform  to  style  and  to  satisfy  an  aesthetic 
taste.  The  same  is  true  of  the  demand  for  elabor- 
ate and  expensive  dwellings. 

The  greater  persistence  of  physical  wants  and 
the  greater  expansibility  of  those  wants  which 
may  be  said  to  arise  out  of  man's  spiritual  nature, 
are  illustrated  by  an  investigation  of  actual  ex- 
penditures among  certain  classes  of  society  in 
Prussia.  Though  this  inquiry  did  not  include 
those  whose  incomes  exceeded  $1,100  a  year,  thus 
omitting  those  whose  expenditures  would  show  the 
greatest  development  of  spiritual  wants,  the  results 
are  important  in  their  general  bearing  upon  the 
question  of  the  development  of  wants.  The  ex- 
penditures were  grouped  in  eight  classes,  viz.,  (1) 
subsistence,  (2)  clothing,  (3)  lodging,  (4)  firing 
and  lighting,  (5)  education,  public  worship,  etc., 
(6)  legal  protection,  (7)  care  of  health  and  (8)  com- 
fort, mental  and  bodily  recreation.  A  comparison 
was  made  of  expenditures  for  these  several  classes 
of  commodities  under  three  classes  of  income,  viz. , 
(1)  $225-$300,  (2)  $450-1600  and  (3)  $750-$!, 100. 
The  results  showed  that  the  expenditures  for  the 
first  four  classes  of  commodities,  which  include 
those  in  which  the  physical  wants  are  most  promi- 
nent, were  95%,  90%  and  85%  for  each  of  the 
three  grades  of  income  respectively,  leaving  for  the 


154  THEORY  OF -ECONOMICS 

second  four  classes  of  items,  where  the  influence  of 
the  spiritual  wants  is  more  marked,  5%,  10%  and 
15%  for  each  of  the  three  grades  of  income.  If  it 
were  possible  to  distinguish  between  the  purely 
physical  and  the  spiritual  wants  represented  in  the 
increase  of  expenditures  for  subsistence,  clothing, 
lodging,  firing  and  lighting,  in  the  case  of  the  larger 
incomes,  there  is  little  doubt  that  the  increase  in 
relative  expansibility  of  spiritual  wants  would  be 
found  much  greater  than  appears  from  the  figures 
given.1 

71.  The  third  characteristic  of  wants  mentioned 
as  influencing  the  efficiency  of  demand  is  heathful- 
ness.  A  want  is  healthful  from  the  standpoint  of 
economics  when  it  is  of  such  a  wholesome  character 
that  its  satisfaction  conduces  to  the  maintenance  of 
human  energy  and  to  the  further  growth  of  health- 
ful wants.  Some  wants  call  for  that  which  kills; 
others  for  that  which  nourishes  and  promotes  de- 
velopment in  ever  increasing  measure.  From  the 
side  of  their  healthfulness,  wants  may  be  distin- 
guished according  as  they  require  for  their  satisfac- 
tion food  or  poison,  considering  these  terms  to  apply 
to  spiritual  as  well  as  to  physical  wants.  For  ex- 
ample, from  an  economic  standpoint,  the  want  for 
nourishing  food  promotes  economic  efficiency,  not 
only  by  increasing  man's  efficiency  as  a  laborer  or 
entrepreneur,  but  also  by  contributing  to  the  effi- 
ciency of  demand  through  its  effect  upon  the  fur- 

1  Massachusetts  Bureau  of  Labor,  Report  for  1885.  Reprint 
edition,  p.  250. 


THE  DEVELOPMENT  OF  DEMAND       155 

ther  development  of  wants.  On  the  other  hand,  the 
want  for  stimulants,  except  when  concerned  with  a 
temporary  emergency,  is  economically  detrimental 
in  two  ways; — it  undermines  man's  energy,  thereby 
decreasing  his  effectiveness  for  producing  commod- 
ities, and  it  obstructs  the  growth  of  healthy  wants, 
thereby  retarding  the  development  of  an  efficient 
demand.  A  want  may  be  both  persistent  and 
expansible,  but  if  its  satisfaction  is  unhealthful,  its 
ultimate  effect  is  to  diminish  economic  efficiency. 

72.  A  further  condition  affecting  the  develop- 
ment of  wants  is  found  in  the  relation  of  interde- 
pendence existing  between  certain  classes  of  wants, 
so  that,  even  though  the  germs  of  all  wants  may 
exist  in  the  lowest  stage  of  human  development,  it 
is  not  a  matter  of  indifference,  which  wants  first 
receive  attention.  It  has  been  seen  that  physical 
wants,  though  less  expansible  than  spiritual,  are 
relatively  more  persistent.  It  is  also  true  that  the 
physical  wants  are  first  in  order  of  development, 
and  that  their  satisfaction  is  the  first  requisite  for 
the  development  of  the  spiritual  wants.  This  fact 
may  well  receive  attention  in  view  of  the  frequent 
efforts  at  social  reform  directed  immediately  towards 
man's  spiritual  nature,  when  the  physical  wants 
are  still  very  inadequately  met.  It  is  a  fundamental 
economic  truth  that  until  at  least  the  necessities  of 
life  are  provided,  spiritual  wants  can  find  but  little 
opportunity  for  development.  On  the  other  hand, 
it  is  equally  true  that  the  physical  wants  may  be  so 
satisfied  as  to  obstruct  the  growth  of  spiritual  wants. 


156  THEORY  OF  ECONOMICS 

Both  exhausting  struggle  for  physical  existence  and 
excessive  gratification  of  physical  appetite  tend  to 
smother  the  higher  wants. 

73.  In  so  far,  then,  as  demand  involves  the  ex- 
istence of  wants,  the  efficiency  of  the  process  of 
producing  demand  depends  upon  the  degree  to  which 
existing  wants  are  satisfied,  the  character  of  the 
wants  satisfied  and  the  order  in  which  they  are 
satisfied.  Economic  demand,  however,  requires  not 
only  the  existence  of  general  wants  but  also  the 
concentration  of  those  wants  upon  specific  commod- 
ities, for  only  then  does  want-attracting  power 
result.  This  concentration  of  wants  upon  commod- 
ities, depends  (1)  upon  a  knowledge  of  the  exist- 
ence and  character  of  commodities  and  (2)  upon  a 
prospect  of  success  in  the  effort  to  secure  them. 

The  effort  to  obtain  a  knowledge  of  the  character 
of  commodities  is  an  important  feature  of  business 
activity.  Scientific  investigation  is  readily  recog- 
nized as  a  prominent  and  essential  feature  of  indus- 
try. Its  importance  to  economic  progress  is  not 
questioned.  In  many  industries,  experts  are  con- 
stantly employed  whose  sole  duty  it  is  to  investigate 
the  qualities  and  possibilities  of  material  in  order  to 
determine  its  adaptability  to  certain  purposes.  The 
results  of  such  investigations  determine  largely  the 
demand  for  those  commodities. 

Another  phase  of  the  process  of  concentrat- 
ing general  wants  upon  specific  commodities  is 
commonly  called  advertising.  Evidences  of  this 
form  of  activity  are  omnipresent.  By  displays  in 


THE  DEVELOPMENT  OF  DEMAND      157 

show-windows,  by  elaborately  prepared  and  pro- 
fusely illustrated  descriptions  in  newspapers,  maga- 
zines, circulars  and  other  special  publications,  by 
expositions  or  fairs,  by  special  agents,  by  signs  and 
a  multitude  of  other  devices,  human  ingenuity 
exerts  itself  to  the  utmost  to  attract  the  attention 
of  the  consumer  and  secure  his  demand. 

Advertising  has  usually  received  the  attention  of 
the  student  of  social  phenomena,  if  at  all,  only  to 
be  condemned  as  a  useless  expenditure  of  energy. 
It  is  sometimes  urged  as  an  argument  in  favor  of 
substituting  government  for  individual  initiative 
and  control,  that  the  former  would  render  advertis- 
ing unnecessary  and  thereby  save  to  society  the 
energy  now  expended  upon  it.  According  to  this 
view,  advertising  is  simply  a  device  to  draw  demand 
from  one  source  of  supply  to  another.  As  such,  it 
is  conceived  to  be  of  advantage  only  to  this  or  that 
individual,  according  as  one  succeeds  in  diverting 
trade  to  himself,  so  that,  inasmuch  as  what  the 
successful  advertiser  gains  another  loses,  the  net 
result  to  society  is  the  loss  of  energy  expended  in 
advertising.  Few  views  on  economic  subjects  in- 
volve more  serious  error. 

It  is  doubtless  true  in  the  matter  of  advertising, 
as  in  all  other  phases  of  the  economic  process,  that 
there  is  loss  because  of  misdirected  energy.  But 
the  results  of  advertising  do  not  consist  merely  or 
necessarily  in  promoting  the  interests  of  one  in- 
dividual at  the  expense  of  another.  Advertising  is 
a  means  whereby  general  wants,  which  would  other- 


158  THEORY  OF  ECONOMICS 

wise  remain  general,  are  crystallized  into  specific 
wants  for  particular  commodities.  Furthermore, 
advertising  not  only  conveys  a  knowledge  of  where 
and  how  things  that  are  wanted,  may  be  obtained; 
it  tends  also  to  develop  a  demand  which  did  not  be- 
fore exist,  for  one  often  wants  something  as  a  result 
of  knowing  that  it  can  be  obtained.  In  all  this,  it 
performs  an  immense  service  to  society.  Indeed,  the 
service  of  advertising  is  one  that,  in  the  modern 
highly  developed  organization,  is  absolutely  indis- 
pensable to  economic  efficiency. 

Nor  is  the  effect  of  advertising  in  diverting  trade 
from  one  party  to  another,  necessarily  an  evil.  In 
doing  this,  it  may  be  promoting  the  survival  of  the 
fittest  and  thereby  contributing  to  economic  prog- 
ress. Society  will  undoubtedly  gain  in  economic 
efficiency  by  improvements  which  will  enable  the 
results  of  advertising  to  be  attained  with  less  ex- 
penditure of  energy,  just  as  it  profits  by  improved 
machinery  or  training,  or  by  any  other  change  which 
increases  the  effectiveness  of  its  applications  of 
energy.  But  to  condemn  advertising  as  a  waste  of 
energy  merely  because  the  future  may  see  less  ex- 
pensive methods  employed,  is  as  illogical  as  to  de- 
clare that  the  old  hand  printing-press  was  a  useless 
contrivance  because  it  has  been  found  possible  to 
substitute  for  it  a  more  economical  machine.  The 
loss  of  energy  which,  in  the  absence  of  advertising, 
would  result  through  the  continued  use  of  relatively 
inefficient  methods,  far  surpasses  the  entire  expend- 
iture of  energy  therefor.  To  appreciate  its  impor- 


THE  DEVELOPMENT  OF  DEMAND       159 

tance  one  needs  only  to  contemplate  the  condition 
that  would  result  if  this  feature  of  the  economic 
process  did  not  exist.  The  high  grade  of  modern 
economic  efficiency  consists  not  only  in  the  exist- 
ence of  superior  methods  of  producing  a  supply 
but  also  in  the  fact  that  men  want  this  supply.  The 
average  man  of  the  twentieth  century  surpasses 
the  average  man  of  any  previous  age  not  less  truly 
in  his  capacity  to  demand  than  in  his  capacity  to 
supply.  To  this,  all  agencies  for  discovering  and 
disseminating  knowledge  contribute. 

74.  Finally,  for  that  concentration  of  wants 
upon  specific  commodities  which  is  essential  to 
economic  demand,  there  must  exist  the  prospect  of 
success  in  the  effort  to  secure  the  commodities.  For 
economic  demand  does  not  include  all  the  wants 
that  individuals  might  have  for  specific  commodi- 
ties; it  is  limited  to  those  wants  which  actually 
seek  satisfaction.  Under  a  simple  form  of  organ- 
ization, where  the  steps  in  the  process  of  satisfying 
wants  lie  within  the  control  of  a  single  individual, 
the  prospect  of  success  in  the  attempt  to  satisfy 
wants  depends  merely  upon  the  individual's  posses- 
sion of  the  necessary  factors  of  production.  The 
farmer  can  satisfy  his  want  for  food  to  the  extent 
that  he  has  the  proper  facilities  for  producing  food 
and  knows  how  to  use  them  and  is  willing  to  make 
the  requisite  exertion.  In  other  words,  under  these 
conditions,  the  ability  to  produce  commodities  and 
the  ability  to  gratify  wants  are  one  and  the  same. 

With  the  introduction  of   division  of    function, 


160  THEORY  OF  ECONOMICS 

however,  an  individual  and  his  possessions  consti- 
tute but  a  part  of  the  requisites  for  success  in  the 
effort  to  satisfy  wants.  Under  such  conditions, 
one's  own  efforts  minister  in  part  to  his  wants  and 
in  part  to  the  wants  of  others;  while  others,  in  like 
manner,  contribute  to  their  wants  and  to  his.  In 
such  a  state  of  interdependence,  one's  prospect  of 
success  in  the  attempt  to  satisfy  his  wants  and, 
therefore,  his  effective  demand,  depend  not  only 
upon  what  he  produces,  but  also  upon  what  others 
produce  and  upon  what  they  demand.  In  the  first 
instance,  the  individual  uses  the  means  at  his  dis- 
posal to  produce  a  supply  of  commodities,  more  or 
less  with  a  view  to  meeting  the  wants  of  others. 
This,  his  contribution  to  supply,  is  at  the  same 
time  a  factor  in  his  ability  to  secure  the  products  of 
others,  i.  e.,  in  his  effective  demand  for  what  others 
have  produced  for  themselves  and  for  him.  The 
baker's  bread,  the  miner's  coal,  the  weaver's  cloth 
and  the  cobbler's  shoes  are  for  each  his  supply  and 
at  the  same  time  a  condition  of  his  effective  demand. 
But  the  product  of  each  is  but  one  factor  in  his 
effective  demand,  for  the  demand  of  each  is  effective 
only  when  he  has  found  some  one  who  in  turn  de- 
mands his  commodity.  The  miner  is  hungry  and 
has  a  general  want  for  food.  He  learns  that  bread 
will  satisfy  this  want  and  that  a  supply  of  bread  is 
in  the  possession  of  the  baker.  The  conditions  of 
effective  demand  are  met  in  part.  There  exists  a 
general  want  and  it  has  been  specialized  in  so  far  as 
that  requires  a  knowledge  both  that  bread  will  sat- 


THE  DEVELOPMENT  OF  DEMAND      161 

isfy  the  want  and  where  bread  can  be  found.  But 
there  is  still  something  lacking.  The  miner  offers 
his  coal  to  the  baker  and  finds  that  it  meets  the 
latter' s  want  for  fuel,  and  then  there  exists  in  the 
full  economic  sense  a  demand  for  bread.  In  like 
manner,  starting  from  the  baker  with  his  general 
want  for  fuel  directed  towards  coal,  and  his  supply 
of  bread  in  excess  of  his  own  final  want  therefor, 
which  the  miner  desires,  there  can  be  traced  an  eco- 
nomic demand  for  coal. 

The  extensive  use  of  a  medium  of  exchange, 
which  brings  the  consumer  into  relation  with  a 
middleman  instead  of  wdth  the  original  producers  of 
commodities,  obscures  the  interdependence  of  supply 
and  demand.  But  a  complete  analysis  of  economic 
relations  shows  not  only  that  a  man's  purchasing 
power  is  a  necessary  element  in  his  demand,  but 
that  his  purchasing  power  depends  both  upon  his 
ability  to  produce  something  and  also  upon  the 
adaptability  of  that  which  he  produces  to  the  wants 
of  others  and  upon  their  demand  for  it.  In  no 
phase  of  the  economic  process  is  the  mutuality  of 
relations  and  the  absolute  necessity  of  unification  of 
design  to  economic  efficiency,  more  apparent. 

Moreover,  to  the  extent  that,  through  the  de- 
velopment of  division  of  function,  ownership  in  the 
means  for  producing  a  complete  commodity  is  no 
longer  centered  in  one  individual  but  is  divided 
among  several,  one's  effective  demand  is  dependent 
also  upon  the  distribution  of  wealth.  For  under 
such  conditions,  one's  ability  to  purchase  depends 


162  THEORY  OF  ECONOMICS 

upon  what  he  receives  in  return  for  the  services 
rendered  by  his  factor  or  factors  in  the  production 
of  wealth.  In  the  analysis  of  the  economic  proc- 
ess, it  was  found1  that  when  men  cooperate  for  the 
production  of  wealth,  its  distribution  among  the 
parties  thereto  is  essential  to  the  realization  of  the 
end  of  that  process.  But  distribution  is  important 
not  only  because  it  is  essential  to  the  final  satis- 
faction of  wants,  but  also  because  it  affects  the 
efficiency  of  production,  for  upon  the  distribution 
of  commodities  depend  the  possessions  of  the  indi- 
vidual and  these  influence  the  production  both  of 
supply  and  of  demand.  An  efficient  system  of  dis- 
tribution is  indispensable  to  efficient  production. 

l!86. 


PART  III 


DISTRIBUTION 


DISTRIBUTION 


75.  Distribution,  as  a  feature  of  the  economic 
process,  is  concerned  with  the  sharing  of  wealth  by 
the  members  of  society.  The  process  of  distribu- 
tion, as  popularly  understood,  includes  the  trans- 
portation of  commodities  from  place  to  place  until 
they  reach  the  final  consumer,  as  when  cotton  grown 
in  South  Carolina  is  shipped  to  England,  manu- 
factured into  cloth,  and  then  sent  perhaps  to  China, 
where  it  is  consumed.  From  the  stand-point  of 
economic  theory,  however,  the  transportation  of 
commodities  is  a  part  of  the  process  of  production, 
which  consists  in  getting  commodities  not  only  into 
the  form  but  also  into  the  place  in  which  they  are 
wanted.  Distribution,  on  the  other  hand,  is  con- 
cerned with  the  amount  of  wealth  that  accrues  to 
the  various  members  of  society. 

Distribution  or  the  sharing  of  products  arises 
from  economic  organization,  in  which,  because 

Walker,  Political  Economy,  g  244  et  seq.;  Gide,  Political 
Economy,  trans.,  Bk.  IV.;  Laughlin,  Elements  of  Political 
Economy,  chapter  xvi.;  Ely,  Outlines  of  Economics,  Bk.  II., 
Pt.  III.,  chapter  i.;  Clark,  The  Distribution  of  Wealth. 

165 


166  THEORY  OF  ECONOMICS 

of  division  of  function,  the  satisfaction  of  the 
wants  of  each  calls  for  some  of  the  commod- 
ities produced  by  others.  Thus,  when  one  man 
is  a  carpenter,  another  a  farmer,  another  a 
tailor,  and  so  on,  it  becomes  necessary  to  share  the 
results  of  the  activities  of  each.  Otherwise  the 
satisfaction  of  wants  would  be  hindered  instead  of 
promoted  by  division  of  function.  If  it  were  possi- 
ble for  each  to  produce  all  that  the  satisfaction  of 
his  wants  required,  there  would  be  no  sharing  of 
products  among  the  members  of  society.  It  is, 
then,  due  to  the  existence  of  cooperation  among 
men  that  it  becomes  necessary  to  distribute  the  out- 
put of  the  process  of  production.  It  belongs  to 
distribution  as  a  part  of  economic  theory  to  describe 
the  process  of  dividing  the  product  and  to  discover 
and  formulate  the  principles  according  to  which 
the  amounts  of  wealth  which  the  various  members 
of  society  receive,  are  determined. 

76.  Certain  conditions  combine  to  give  special  im- 
portance to  this  feature  of  the  economic  process. 
An  individual  seeking  to  maintain  life  and  to  attain  a 
higher  development  seeks  that  which  will  satisfy  his 
wants,  through  which  alone  existence  and  progress 
are  possible.  To  this  end  it  does  not  sumce  merely 
that  a  large  amount  of  commodities  should  be  pro- 
duced. The  satisfaction  of  one's  wants  depends 
upon  the  amount  that  he  can  apply  to  his  own  use. 
But,  as  a  result  of  human  nature,  in  which  the 
capacity  of  want-development  is  indefinitely  great, 
there  are  always  some  wants  unsatisfied.  Man  is 


DISTRIBUTION  167 

always  seeking  more;  and  success  in  this  effort  de- 
pends upon  one's  ability  to  secure  a  larger  portion 
in  the  distribution  of  wealth,  which  may  or  may 
not  be  accompanied  b}^  a  larger  production  of  wealth. 
It  is  characteristic  of  much  of  the  means  for  sat- 
isfying wants  that  its  utilization  by  one  involves 
its  non-utilization  by  others.  It  is  true  that  in  a 
large  number  of  instances,  too  often  overlooked  as 
of  no  importance  to  the  economist  or  ignored  as  be- 
ing outside  the  scope  of  economic  investigation, 
wants  are  of  such  a  character  that  the  use  of  com- 
modities to  minister  to  one  person  interferes  but 
little,  if  at  all,  with  their  use  by  others.  To 
satisfy  some  of  the  aesthetic  desires,  one  needs  but 
to  see  or  to  hear.  A  beautiful  picture  or  a  song 
can  minister  to  the  wants  of  many  at  the  same  time. 
The  wants  to  which  the  Sistine  Madonna  or  Central 
Park  ministers,  are  not  necessarily  less  fully  satis- 
fied because  others  are  being  served  in  like  manner. 
On  the  other  hand,  many  wants  are  preeminently 
exclusive,  i.  e.,  the  commodities  that  minister  to 
them  can  serve  only  one  or  a  few  persons.  Ex- 
amples of  these  are  found  in  nearly  all  of  the  com- 
modities that  are  required  by  the  wants  which  arise 
from  the  physical  nature  of  man,  such  as  the  want 
for  food,  for  clothing  and  fuel.  If  a  loaf  of  bread 
ministers  to  the  hunger  of  one,  it  cannot  minister 
to  the  same  want  in  another.  In  this  class,  should 
be  included  also  that  most  expansive  and  exclusive 
of  all  wants,  the  desire  for  private  ownership.  If  the 
Sistine  Madonna  satisfied  some  one's  want  for  it 


168  THEORY  OF  ECONOMICS 

merely  to  call  it  his  own,  its  sphere  of  service  might 
be  very  much  narrowed. 

Commonplace  as  the  facts  of  the  expansibility 
of  wants  and  the  exclusiveness  of  many,  are,  they 
deserve  consideration,  for  they  are  potent  causes 
of  rivalry  of  interests  among  members  of  society. 
And  rivalry  of  interests  leads  to  serious  problems. 
Indeed,  most  of  the  controversies  that  disturb 
society  are  traceable  directly  to  one  or  both  of 
these  causes.  The  social  problems  are  largely  prob- 
lems of  distribution.  Herein  may  be  found  the 
principal  occasion  of  the  problems  of  labor,  social- 
ism, money,  banks,  railroads,  tariffs  and  trusts,  as 
well  as  of  others.  And  upon  a  correct  understanding 
of  the  fundamental  principles  of  distribution  de- 
pends in  large  measure  one's  equipment, for  solving 
these  problems. 

77.  The  system  of  distribution  prevailing  at  any 
time  is  the  result  of  social  choice.  That  is  to 
say,  it  is  not  an  arrangement  existing  by  virtue  of 
certain  physical  laws  independent  of  social  will  and 
regardless  of  the  demand  of  social  needs,  but  is 
the  result  of  society's  judgment,  i.  e,,  it  is  a 
method  of  dividing  the  output  of  the  productive 
process  among  the  members  of  society,  which  is 
established  by  society,  presumably  because  the  par- 
ticular system  adopted  is  deemed  best  suited  to  pro- 
mote the  general  welfare. 

From  the  nature  of  the  system  of  distribution  as 
a  creation  of  society,  it  follows  that,  in  common 
with  all  other  social  institutions,  it  is  subject  to 


DISTRIBUTION  169 

change.  Moreover,  it  may  be  accepted  as  inevita- 
ble that  the  system  will  be  changed,  whenever 
society  believes  that  some  other  than  the  existing 
one  will  give  a  better  distribution  of  its  wealth. 
The  essential  nature  of  society  compels  it  to  seek 
the  best  method  it  can  devise  for  satisfying  its 
wants,  and  it  is  in  accord  with  this  principle  that  a 
new  system  or  a  modification  of  the  old  will  follow 
inevitably  when  society  is  convinced  that  better 
want-satisfaction  will  result  from  such  change. 

This  fact  should  have  a  practical  bearing  in  influ- 
encing the  attitude  of  men  toward  propositions  for 
modifying  the  existing  methods  of  distribution. 
The  tendency  is  very  strong  to  accept  the  existing 
order,  especially  when  one's  immediate  interests 
appear  to  be  promoted  by  it,  as  of  necessity  perma- 
nent. This  leads  to  a  placid  acquiescence  in 
the  bad  as  well  as  in  the  good  in  existing 
conditions  with  an  attitude  of  helpless  sub- 
mission to  the  decrees  of  blind  fate.  The 
ultimate  result  of  such  a  policy  may  be  such  a 
congestion  of  evils  as  finally  to  destroy  the  barriers 
of  conservatism  and  by  the  Very  impetuosity  of 
radicalism,  to  lead  to  a  new  horde  of  evils.  For  it 
is  the  teaching  of  history  that  social  institutions, 
so  far  from  being  permanent,  are  in  a  continual 
state  of  readjustment,  and  that  to  the  extent  that 
such  readjustment  is  retarded  beyond  what  is  neces- 
sary to  insure  the  utility  of  prospective  changes, 
serious  disorders  follow.  The  histories  of  England 
and  of  France  afford  ample  illustration  of  the  differ- 


170  THEORY  OF  ECONOMICS 

ence  between  the  results  of  social  evolution  and  of 
social  revolution.  Experience  teaches  also  that  an 
individual  may  retard  but  can  not  prevent  social 
readjustment,  and  the  French  Revolution  stands  as 
a  permanent  demonstration  of  the  dangers  involved 
in  the  undue  postponement  of  the  readjustment  of 
social  institutions  to  meet  changes  in  social  needs. 
But,  though  the  system  of  distribution  is  a 
social  institution  and,  therefore,  subject  to  change, 
it  is  not,  on  the  other  hand,  a  mere  arbitrary  crea- 
tion. It  is  a  development.  It  follows,  then,  that 
attempts  to  improve  upon  the  existing  order  can 
succeed  only  when  made  with  a  due  regard  for  the 
principles  of  development.  This  fact  also  has  an 
important  bearing  upon  the  solution  of  the  prob- 
lems arising  out  of  distribution.  It  has  been  said 
that  an  individual  may  retard  but  he  can  not  pre- 
vent social  changes.  It  is  equally  true  that  an  in- 
dividual may  hasten  a  change  but  he  cannot  achieve 
an  improvement  in  social  conditions  by  that  change 
merely  because  he  intends  an  improvement.  Prog- 
ress does  not  necessarily  follow  change,  and  the 
methods  by  which  alone  progress  can  be  attained  are 
not  determined  by  the  wishes  of  would-be  reform- 
ers. Though  men  are  in  some  degree  free  to  choose 
whatever  system  of  distribution  they  will,  they  can 
not  escape  the  consequences  of  their  choice.  If  a 
policy  is  adopted  that  is  out  of  harmony  with  the 
conditions  essential  to  progress,  it  will  be  self- 
defeating.  Thus,  since  the  system  of  distribution 
sustains  a  vital  relation  to  the  process  of  production, 


DISTRIBUTION  171 

especially  in  its  influence  upon  the  incentive  to 
activity,  which  so  largely  conditions  productive 
efficiency,  and  since  the  first  requisite  for  distribu- 
tion is  something  to  distribute,  if  a  method  of  dis- 
tribution be  adopted  which  impairs  the  efficiency  of 
production,  it  will  defeat  the  very  end  of  distribu- 
tion by  destroying  the  source  from  which  the  fund 
to  be  distributed  is  derived. 


THE  BASIS  OF  DISTRIBUTION 


78.  The  fundamental  characteristic  of  a  system 
of  distribution  is  the  basis  which  serves  as  a  cri- 
terion for  determining  the  amount  of  product  to 
which  the  parties  to  the  distribution  are  entitled. 
In  case  men  cooperate  in  some  undertaking,  they 
must  adopt  a  basis  for  dividing  the  result 
thereof.  For  example,  if  several  cooperate  to  raise 
a  crop  of  corn,  they  must  settle  upon  some  basis  of 
division.  They  may  agree  that  each  shall  have 
the  product  raised  on  a  definitely  specified  portion 
of  land,  or  that  each  shall  have  a  certain  portion  of 
the  yield  as  measured  in  bushels,  or  that  each  shall 
receive  a  certain  portion  of  the  returns  from  the 
sale  of  the  crop,  or  that  the  division  shall  be  made 
in  some  other  way.  But  some  basis  of  division 
must  be  applied.  Moreover,  it  is  not  a  matter  of 

Clark,  The  Distribution  of  Wealth,  pp.  1-9,  36-51,  et  al.; 
Pantaleoni,  Pure  Economics,  trans.,  Pt.  III.,  chapter  i. ; 
Gide,  Political  Economy,  trans.,  Bk.  IV.,  Pt.  I.,  chapter  ii.; 
Sidgwick,  Principles  of  Political  Economy,  Bk.  II.,  chapter 
i. ;  note  also  the  basis  of  distribution  involved  in  the  theories 
of  Walker,  Ely,  Mill  and  Laughlin. 

172 


THE  BASIS  OF  DISTRIBUTION          173 

indifference  to  the  parties  concerned,  what  basis  of 
distribution  is  agreed  upon.  Some  plans  are  more 
in  accord  with  the  sense  of  justice  than  others. 
Thus  the  method  of  dividing  on  the  basis  of  the 
yield  of  specific  portions  of  the  land,  though  easily 
applied,  is  apt  to  be  unsatisfactory,  since  it  fails  to 
take  proper  account  of  differences  in  the  fertility  of 
different  parts  of  the  soil.  This  method  was  largely 
employed  in  the  old  manorial  system  of  mediaeval 
times,  where  for  a  given  season  each  member  of 
the  community,  serf  and  lord,  was  entitled  to  the 
yield  from  a  definite  portion  of  land.  The  disad- 
vantages arising  from  inequalities  in  the  fertility  of 
the  soil  were  in  a  measure  offset  by  dividing  the 
entire  area  to  be  cultivated  into  small  strips  and 
assigning  these  to  the  members  of  the  manor  in 
such  a  way  that  each  man's  holding  consisted  of 
small  sections  lying  in  different  parts  of  the  estate. 
Occasional  redistribution  of  these  strips  tended  to 
lessen  still  further  the  inequalities  arising  trom 
differences  in  fertility.  But  at  best  this  method  was 
open  to  criticism  from  the  standpoint  of  justice,  and 
with  the  development  of  permanent  tenure  in  land- 
holding,  it  became  entirely  inapplicable. 

But  however  widely  methods  of  distribution  may 
differ  in  the  character  of  their  basic  principle,  all 
must  have  a  basis,  for  it  is  indispensable  to  coopera- 
tion in  the  process  of  satisfying  wants.  Hence, 
society,  which  involves  cooperation  on  the  most  ex- 
tensive scale,  in  establishing  the  principles  of  hu- 
man association,  adopts  certain  bases  according  to 


174  THEORY  OF  ECONOMICS 

which  its  members  shall  share  in  the  benefits  accru- 
ing from  such  cooperation.  The  method  of  estab- 
lishing these  bases  is  through  the  creation  of  rights. 
To  discover  the  basis  of  distribution  in  society, 
then,  it  is  necessary  to  consider  the  rights  estab- 
lished, in  their  relation  to  the  sharing  in  the  wealth 
produced. 

79.  The   economic  test  of    the   sufficiency  of  a 
basis  of  distribution  is  its  effect  upon  the  process  of 
satisfying  wants,   for  a  system  of  distribution,  in 
like  manner  with  all  other  phases  of  the  economic 
process,  must  be  approved  or  condemned  according 
as  it  promotes  or  impedes   the  attainment  of   the 
end  of  that  process.     Thus  in  primitive  times,  the 
basis  of  distribution  was  to  a  considerable  extent, 
physical  strength.     So  far  as  this  prevailed,  a  man 
was  considered  entitled  to  what  he  could  get  and 
keep.     But  such  a  system  of  distribution  involved 
a  large  expenditure  of  energy  for  the  protection  of 
one's  possessions,  and  in  time  more  peaceful  methods 
were  substituted,  through  the  widening  of  the  scope 
of  property  and  contract  rights.     The  gain  result- 
ing from  the  accompanying  saving  of  energy  showed 
itself    in   an   increased    economic    efficiency.     But 
though  different  bases  of  distribution  may  suit  dif- 
ferent  times  and  places,   the  ultimate   test  is  the 
same.     Does  the  system  most   efficiently   promote 
the   satisfaction   of  wants  or  is  another  system  or 
some   modification   of  the  existing   S3^stem,  better 
suited  to  that  end? 

80.  Theoretically  speaking,  the  bases  of   distri- 


THE  BASIS  OF  DISTRIBUTION          175 

bution  which  might  be  adopted  are  numerous. 
Four  only,  however,  require  consideration.  These 
may  be  designated  (1)  equality,  (2)  need,  (3)  pro- 
duction and  (4)  value  of  services. 

Distribution  on  the  basis  of  equality  gives  to  the 
members  of  society  equal  shares  of  product.  It  is 
advocated  by  some  who  assert  that  all  men  are 
equal  and  are  therefore  entitled  to  equal  portions  of 
wealth.  In  actual  practice,  however,  this  theory 
finds  but  little  application.  It  may,  perhaps,  be 
said  to  prevail  in  the  distribution  of  rations 
among  soldiers,  in  the  allowances  to  inmates 
of  penitentiaries  and  in  the  distribution  of  es- 
tates among  heirs,  in  so  far  as  the  law  provides 
for  equal  shares.  But  as  a  general  basis  on 
which  to  distribute  the  large  fund  of  wealth 
among  the  members  of  society,  it  receives  but  little 
support.  The  reason  is  not  difficult  to  discover. 
The  basis  is  totally  incompatible  with  efficient  pro- 
duction, as  it  seriously  impairs  the  incentive  to 
activity.  An  adequate  incentive  to  activity  requires 
that  the  prospect  of  reward  should  be  seen  in  im- 
mediate relation  to  action.  Distribution  on  the  basis 
of  equality  would  not  only  encourage  rashness,  by 
giving  to  him  who  fails  the  same  reward  as  to  him 
who  succeeds,  but  it  would  also  develop  idleness, 
by  giving  to  him  who  does  not  even  try  to  produce, 
the  same  as  to  him  who  does.  This  basis  is  con- 
demned alike  by  the  test  of  economic  sufficiency  and 
by  the  general  sense  of  justice  among  men,  which  ac- 
cepts the  doctrine  that  reaping  should  follow  sowing. 


176  THEORY  OF  ECONOMICS 

81.  The  system  of  distribution  on  the  basis  of 
need,  is  suggested  by  its  designation.  It  calls  for 
the  sharing  of  wealth  by  members  of  society  accord- 
ing to  their  several  needs  rather  than  according  to 
their  several  performances.  Wants,  not  services, 
are  taken  as  the  basis  of  the  right  to  share.  Though 
not  the  prevailing  principle  of  distribution,  as  so- 
ciety is  now  organized,  it  finds  a  limited  applica- 
tion. The  attempt  is  made  to  distribute  charity  on 
this  basis,  and  it  appears  in  substance  wherever  one 
is  allowed  to  appropriate  wealth  to  his  own  use 
without  a  compensation  graded  accordingly.  Thus 
the  post-office  charges  a  fixed  amount  for  carrying 
a  letter  of  a  given  size,  and  then  conveys  it  a  long 
or  a  short  distance  according  to  the  desire  of  the 
sender.  A  similar  policy  prevails  in,  the  street- 
car service  wherever  a  fixed  charge  is  made  regard- 
less of  whether  the  passenger  rides  one  block  or 
many.  This  basis  finds  application  also  in  the  case 
of  public  streets,  parks  and  schools,  where  the  use 
allowed  to  the  individual  bears  no  relation  to  the 
size  of  his  contribution  thereto. 

But  wherever  this  basis  is  applied,  the  reason 
therefor  lies  not  so  much,  if  at  all,  in  consideration 
for  the  specific  individual  benefited,  as  in  the  re- 
quirement of  the  good  of  society  as  a  whole,  or  of 
whatever  agency  is  responsible  for  the  adoption  of 
the  system.  Not  the  right  of  the  individual  to  be 
supported  but  the  necessity  of  protecting  society 
from  the  evils  of  pauperism,  is  the  economic  reason 
for  charity;  not  the  advantage  to  this  or  that  indi- 


THE  BASIS  OF  DISTRIBUTION          177 

vidual  from  parks  or  public  schools,  but  the  public 
good  that  is  promoted  by  healthy,  intelligent  citi- 
zens, is  the  economic  reason  for  public  parks  and 
public  schools;  not  the  obligation  to  the  sender  of 
a  letter  or  to  a  passenger  on  a  street-car,  but  the 
greater  advantage  to  society  or  to  the  transportation 
company,  is  the  economic  reason  for  fixed  charges 
and  indefinite  services  in  the  post-office  and  street- 
railway. 

Though  advocated  for  general  adoption  by 
some,  who  propose  that  society  shall  exact  "from 
every  one  according  to  his  ability"  and  give  "to 
every  one  according  to  his  need,"  distribution 
according  to  need  is  limited  by  two  serious  obsta- 
cles. In  the  first  place,  as  in  the  case  of  equal 
distribution,  the  distribution  of  product  according 
to  need,  regardless  of  service,  is  opposed  to  a  fund- 
amental requisite  for  efficient  production.  So  long 
as  the  reward  which  alone  can  give  an  adequate  in- 
centive to  activity,  involves  private  ownership  and 
use  of  the  results  of  activity,  a  scheme  which  pro- 
poses to  distribute  according  to  need,  thus  reward- 
ing not  only  the  weak  and  inefficient,  but  also  the 
unwilling  and  indolent,  cannot  be  otherwise  than 
self-defeating,  through  its  destructive  effect  upon 
production.  Its  inevitable  tendency  to  perpetuate 
unfitness  at  the  expense  of  fitness  strikes  at  the 
very  foundation  of  progress. 

A  second  obstacle  to  the  application  of  this 
basis  arises  from  the  fact  that  wants  exceed  the 
means  for  satisfying  them.  In  so  far  as  the  satis- 


178  THEORY  OF  ECONOMICS 

faction  of  the  wants  of  one  does  not  involve  the 
impairment  of  the  satisfaction  of  the  wants  of 
another,  distribution  according  to  need  can  be 
accomplished  by  leaving  each  to  appropriate  the 
means  of  want-satisfaction  as  he  wishes.  The 
larger  number  using  the  mail  and  street-cars  under 
the  present  system  makes  it  the  most  economic  for 
for  society.  Within  wide  limits,  the  freedom  of 
one  to  enjoy  the  advantages  of  public  parks  and 
public  schools,  not  only  does  not  interfere  with  the 
satisfaction  of  the  wants  of  others,  but  actually 
increases  their  want-satisfaction,  because  it  improves 
the  quality  of  their  associates. 

But  in  the  presence  of  wants  in  excess  of  means 
for  satisfying  them,  it  cannot  be  left  to  each  to  ap- 
propriate according  as  he  desires.  The  result  would 
be  a  struggle  so  intense  that  many  would  be  exter- 
minated and  society  would  be  turned  back  towards 
the  primitive  condition  of  savagery.  When  the 
means  for  satisfying  wants  are  inadequate  for  the 
satisfaction  of  all  wants,  distribution  on  the  basis 
of  need  could  be  proportionate  only.  Its  applica- 
tion would  result  not  in  giving  to  each  all  that  he 
needs,  but  in  dividing  the  supply  of  commodities 
among  the  members  of  society  in  proportion  to  their 
needs.  This  would  necessitate  an  estimate  of  needs 
and  of  supply,  and  the  apportionment  of  the  latter 
to  the  former. 

Needs  are  purely  subjective  phenomena,  until 
they  appear  as  wants  for  specific  commodities.  It 
is  impossible  to  measure  them  except  as  they  reveal 


THE  BASIS  OF  DISTRIBUTION          179 

their  relative  intensity  through  individual  choice, 
whereby  one  thing  is  preferred  to  another.  Any 
other  method  of  measuring  needs  would  be  purely 
arbitrary,  the  result  of  the  judgment  of  some  one 
other  than  the  person  having  the  need,  in  which 
case  there  would  be  absolutely  no  assurance  that 
the  resulting  distribution  w^ould  be  proportionate  to 
needs,  and  the  ultimate  effect  would  be  nothing  less 
than  the  surrender  of  personal  freedom.  But  dis- 
tribution according  to  needs  which  are  measured 
by  an  individual's  choice  between  commodities, 
where  the  supply  of  commodities  is  inadequate  to 
satisfy  all  wants,  can  be  applied  only  by  requiring 
one  to  give  in  return  for  what  he  receives  and  by 
allotting  commodities  to  those  who  will  give  most 
for  them  ;  and  from  this  there  results,  not  distribu- 
tion on  the  basis  of  needs,  as  that  is  understood  by 
its  advocates,  but  distribution  on  the  basis  of  value, 
and  this,  as  will  be  seen  later,  is  the  method  pre- 
vailing under  the  present  industrial  organization. 

An  analysis,  then,  of  the  nature  and  re- 
quirements of  distribution  according  to  needs 
shows,  on  the  one  hand,  that  its  application  is 
possible  only  when  that  which  is  to  be  distributed  is 
of  such  a  nature  that  its  appropriation  by  one  will 
not  lessen  the  satisfaction  of  the  wants  of  others. 
For  only  under  such  conditions  can  the  principle 
work  spontaneously,  by  leaving  each  free  to  appro- 
priate as  he  wishes,  thereby  avoiding  the  necessity 
of  an  arbitrary  apportionment  of  product  among 
members  of  society,  an  alternative  which  is  itself 


180  THEORY  OF  ECONOMICS 

incompatible  with  the  system.  The  analysis  shows, 
on  the  other  hand,  that  the  principle  of  distribution 
according  to  needs,  even  if  possible,  is  feasible  only 
when  conditions  are  such  that  it  can  be  applied 
without  endangering  the  efficiency  of  production 
through  its  tendency  to  impair  the  incentive  to 
activity. 

Under  these  circumstances,  it  is,  to  say  the  least, 
extremely  doubtful  whether  conditions  can  ever 
exist  which  will  justify  anything  like  a  general 
adoption  of  this  basis  as  the  predominent  method 
of  dividing  product.  There  are,  however,  some 
reasons  for  believing  that  the  basis  may  attain  a 
much  wider  application  than  it  does  at  present.  The 
most  serious  obstacle  to  its  working  is  the  preva- 
lence of  exclusive  wants.  And  though  present 
business  methods  do  not  seem  to  afford  much  ground 
for  anticipating  a  large  predominence  of  non-exclu- 
sive wants,  in  the  near  future,  their  spread  is  more 
extensive  and  rapid  than  a  casual  view  reveals. 
The  growing  tendency  of  men  of  wealth  to  endow 
public  institutions  and  the  disposition  of  municipali- 
ties to  undertake  the  establishment  of  parks  and 
other  enterprises,  the  enjoyment  of  which  may  be 
appropriated  freely,  are  essentially  an  increase  in 
the  application  of  distribution  according  to  need. 
Moreover,  it  is  by  no  means  impossible  that  when 
the  progress  of  discovery  in  the  realm  of  the  physi- 
cal world  shall  have  further  lightened  the  burden  of 
maintaining  existence,  and  when  a  higher  intelli- 
gence shall  control  men's  views  of  life,  a  far  wider 


THE  BASIS  OF  DISTRIBUTION          181 

field  for  the  operation  of  this  basis  will  be  opened. 
The  desire  for  private  ownership,  which  is  now  the 
mainspring  of  economic  activity,  and  is  preemi- 
nently an  exclusive  want,  may  then  yield  its  su- 
premacy as  an  incentive  to  activity,  to  a  desire  for 
spiritual  growth.  Under  such  conditions,  greater 
community  of  participation  in  the  means  for  satisfy- 
ing wants  will  be  possible  and  will  be  desired  by 
the  members  of  society.  Even  here,  however,  the 
application  of  the  basis  will  be  possible  only  in  the 
case  of  such  means  for  satisfying  wants  as  can, 
without  injury  to  society,  be  thrown  open  to  appro- 
priation by  men  either  without  direct  return  there- 
for, or  with  a  return  that  is  not  adjusted  in  size  to 
the  amount  received. 

82.  A  third  basis  proposed  for  distribution  is  that 
wealth  shall  be  apportioned  among  the  mem- 
bers of  society  according  to  the  amount  contributed 
by  each  to  the  production  of  wealth.  This  is  some- 
times called  distribution  according  to  service,  but 
such  a  designation  of  this  basis  should  be  qualified 
by  adding  that  the  service  is  to  be  determined  by 
measuring  the  amount  of  each  one's  contribution  to 
production.  But  the  question  arises,  how  is  one's 
contribution  to  production  to  be  determined  ?  Some 
answer,  by  ascertaining  the  amount  of  labor  ex- 
pended, on  the  ground  that  wealth  is  the  product 
solely  of  labor.  But  there  are  few,  if  any,  more 
fallacious  propositions  than  that  which  holds  that 
wealth  is  due  to  labor  alone.  Labor,  unaided  by 
the  other  factors  of  production,  is  absolutely  help- 


182  THEOR  Y  OF  ECONOMICS 

less  and  can  produce  no  wealth.  Even  if  enterprise 
be  considered  an  element  of  labor,  it  still  remains 
true  that  labor  without  capital  and  situation  is  as 
helpless  in  the  production  of  wealth,  as  are  capital 
and  situation  without  labor.  To  distribute  on  the 
basis  of  contribution  to  production,  it  is  necessary 
to  ascertain  the  amount  contributed  by  each  of  the 
factors,  in  order  that  the  owners  thereof  may  re- 
ceive in  proportion  thereto.  • 

It  is  sometimes  assumed  that  the  contribution  of 
the  several  factors  can  be  determined  by  ascertain- 
ing the  difference  between  the  amounts  produced 
before  and  after  the  addition  of  a  unit  of  each  to 
the  productive  operation.  Thus,  if,  after  adding 
ten  laborers  to  the  force  engaged  in  manufacturing 
shoes,  the  output  is  increased  by  ten  pairs  of  shoes, 
it  is  inferred  that  ten  pairs  of  shoes  represent 
what  the  ten  men  have  produced.  The  conclusion 
seems  plausible,  but  it  is  fallacious.  Suppose  five 
men  attempt  to  lift  an  iron  rail  but  find  that  they 
cannot  accomplish  it.  Two  more  men  are  added 
and  the  rail  is  lifted.  The  method  of  determin- 
ing the  contribution  to  production  described,  would 
be  compelled  to  assign  to  the  two  men  last  added 
the  entire  credit  for  lifting  the  rail,  since  this  rep- 
resents the  difference  between  what  was  accom- 
plished before  and  after  the  addition  of  the  two 
men.  The  fallacy  is  here  apparent.  The  addition 
of  the  two  men  increased  the  efficiency  of  the  entire 
process.  The  same  is  true  of  the  addition  of  the  ten 
men  to  the  shoe  factory.  While  it  is  possible  to 


THE  BASIS  OF  DISTRIBUTION          183 

measure  the  total  efficiency  of  the  productive  oper- 
ation, and  the  increase  in  total  efficiency  which  fol- 
lows the  application  of  additional  amounts  of  one 
or  more  of  the  factors,  it  is  impossible  to  measure 
the  amount  actually  produced  by  any  one  factor  or 
by  any  unit  of  a  factor. 

Moreover,  the  production  of  wealth  does  not  con- 
sist merely  in  the  production  of  a  supply  of  com- 
modities; it  consists  in  the  production  of  value. 
And  for  value  there  must  be  both  supply  and  de- 
mand. Even  if  it  were  possible,  then,  to  measure 
the  contribution  of  a  factor  to  the  production  of 
supply,  this  would  not  give  the  contribution  of  that 
factor  to  the  production  of  value,  for  the  same  con- 
tribution to  the  production  of  supply  will  give  dif- 
ferent values  under  different  conditions  of  demand 
for  that  supply.  Thus,  the  same  contribution  to 
the  production  of  wheat  which  at  one  time  gave 
1,000  bushels,  each  worth  $1.00,  may  at  another 
time  give  1,000  bushels  which  by  reason  of  in- 
creased demand  for  wheat  will  be  worth  $1.50  per 
bushel.  To  whom  will  this  increased  value  go? 
That  depends  upon  the  relation  of  the  supply  of 
and  the  demand  for  the  several  factors.  If,  for  ex- 
ample, the  supply  of  situation  is  more  limited  rela- 
tive to  the  demand  for  it  than  is  the  case  with  the 
other  factors,  the  increase  in  value  will  tend  to  go 
to  the  owner  of  situation,  not  because  situation  has 
contributed  more  to  the  production  of  the  value  of 
the  wheat,  but  because  the  value  of  the  services  of 
situation  has  increased. 


184  THEORY  OF  ECONOMICS 

83.  Under  the  existing  industrial  organization, 
the  shares  of  members  of  society  are  determined, 
with  few  exceptions,  by  the  value  of  the  services  of 
one  or  more  of  the  factors  of  production  owned  by 
them.  To  the  extent  that  the  factors  employed  in 
any  productive  operation  are  owned  by  one  man, 
the  value  of  their  services  is  determined  indirectly 
through  the  sale  of  the  commodity  produced.  Thus 
the  share  of  the  weaver  who  owns  his  plant  and 
raw  materials,  weaves  the  cloth  and  places  it  on 
the  market  as  his  own,  is  determined  through  the 
sale  of  that  product.  But  in  so  far  as  differentia- 
tion in  the  ownership  of  the  factors  has  resulted  in 
their  employment  for  production  by  others  than 
their  immediate  owners,  the  value  of  the  services  of 
the  factors  and  the  shares  received  therefor  are  de- 
termined through  the  sale  of  the  services  them- 
selves. Thus  the  shares  received  by  the  owners  of 
Situation,  capital  and  labor,  when  those  factors  are 
utilized  for  production  by  the  entrepreneur,  are  de- 
termined by  the  sale  of  the  services  of  those  factors. 
To  understand  the  system  of  distribution,  then,  it 
is  necessary  to  ascertain  the  principles  which  oper- 
ate in  the  process  of  buying  and  selling. 


EXCHANGE 


84.  The  distribution  of  product  among  mem- 
bers of  society  is  accomplished  largely  through 
the  operation  of  buying  and  selling.  Individ- 
uals produce  for  others  as  well  as  for  them- 
selves, in  the  expectation  that  by  selling  their 
own  products  they  can  secure  some  of  that 
which  is  produced  by  others.  On  this  plan  the 
share  of  each  member  of  society,  where  division  of 
function  exists,  consists  of  that  portion  of  his  prod- 
uct, if  any,  which  he  retains  for  his  own  use,  and 

Walker,  Political  Economy,  Pt.  III.,  chapters  i.,  iii.; 
L/aughlin,  Elements  of  Political  Economy,  Bk.  II.;  Gide, 
Political  Economy,  trans.,  Bk.  II.,  Pt.  II.,  chapter  iii.; 
Pantaleoni,  Pure  Economics,  trans.,  Pt.  II.;  Ely,  Outlines 
of  Economics,  Bk.  II.,  Pt.  II.,  chapters  ii.-v.;  Monopolies 
and  Trusts,  chapters  iii.,  iv. ;  Jenks,  The  Trust  Problem; 
Von  Wieser,  Natural  Value,  trans.,  Bk.  II.;  Bohni-Bawerk, 
Positive  Theory  of  Capital,  trans.,  Bk.  IV.;  Roscher,  Polit- 
ical Economy,  trans.,  Bk.  II.,  chapter  ii.;  Mill,  Principles 
of  Political  Economy,  Bk.  III.;  Sidgwick,  Principles  of 
Political  Economy,  Bk.  II.,  chapters  ii.,  x.;  Marshall,  Prin- 
ciples of  Economics,  Bk,  V.;  Jevons,  Theory  of  Political 
Economy,  chapter  iv.;  Clark,  The  Distribution  of  Wealth, 
see  index. 

185 


186  THEORY  OF  ECONOMICS 

of  that  portion  of  the  product  of  others  which 
he  secures.  For  example,  the  farmer  may  reserve 
some  of  his  wheat  for  his  own  consumption  and 
with  the  balance  obtain  some  of  that  which 
the  weaver,  the  grocer,  the  carpenter  and  others 
have  produced.  Or  if  the  nature  of  the  com- 
modity is  such  that  it  is  adapted  to  final  con- 
sumption only  after  it  has  passed  through  one  or 
more  processes  carried  on  by  others,  he  who  pro- 
duces it,  will  expect  to  sell  all  of  it.  Such  is  the 
case  when  the  individual  confines  himself  to  raising 
cotton  or  other  raw  materials.  Here  the  individual's 
share  of  product  consists  entirely  of  what  he  secures 
from  others. 

From  the  extensive  application  of  division  of 
function  in  modern  society,  it  has  resulted  that 
a  very  considerable  portion  of  the  effort  to  satisfy 
wants  is  concerned  with  the  operation  of  buying 
and  selling.  Considered  as  a  phase  of  the  economic 
process,  this  is  called  exchange,  and  is  defined  to 
consist  of  the  transfer  of  ownership  in  wealth,  or 
in  the  use  of  wealth.  But  though  this  is  the  imme- 
diate object  of  buying  and  selling,  the  real  sig- 
nificance of  exchange  as  a  feature  of  economic 
activity  arises  from  its  relation  to  the  distribu- 
tion of  product  among  members  of  society. 
Through  the  complicated  and  apparently  con- 
fused mass  of  transactions  concerned  with  buy- 
ing and  selling,  with  markets  and  with  all  that  is 
related  to  the  transfer  of  ownership,  there  is  in  proc- 
ess of  determination  the  amount  of  total  product 


EXCHANGE  187 

which  each  member  of  society  receives.  And  from 
this  it  follows  that  upon  the  existence  of  the  condi- 
tions necessary  to  exchange  and  upon  the  terms  of 
the  exchanges  effected  will  depend  the  character  of 
distribution  and  the  efficiency  of  the  economic 
process,  to  the  extent  that  this  is  dependent  upon 
distribution. 

85.  The  conditions  which  must  exist  in  order 
that  exchange  should  take  place  are  not  difficult  to 
ascertain.  If  an  exchange  of  commodities  is  possi- 
ble, it  will  occur  when  each  of  two  parties  desires  a 
commodity  possessed  by  the  other  more  than  that 
possessed  by  himself.  Thus,  if  one  man,  who  owns  a 
horse,  prefers  a  certain  piece  of  land  to  the  horse, 
and  the  owner  of  that  piece  of  land  prefers  the 
horse  to  the  land,  they  will  exchange.  Such  a 
condition  as  this  has  been  called  a  double  coinci- 
dence of  desires,  and  when  this  exists  an  exchange 
follows,  provided  the  nature  of  the  commodities 
and  the  other  circumstances  involved  permit  of  an 
exchange. 

Carrying  the  analysis  one  step  further,  it  ap- 
pears that  two  conditions  are  essential  to  the 
existence  of  a  double  coincidence  of  desires.  In 
the  first  place,  it  is  necessary  that  the  character  of 
the  commodity  possessed  by  each,  as  regards  its 
general  nature,  its  quality  and  its  available  quan- 
tity, should  be  such  as  to  meet  the  desires  of  the 
other  party;  in  the  second  place,  it  is  necessary  that 
the  two  parties  should  agree  as  to  the  rate  of 
exchange,  i.  <?.,  as  to  the  relative  amounts  of  want- 


188  THEORY  OF  ECONOMICS 

attracting  power  possessed  by  each  commodity,— 
in  short,  they  must  agree  as  to  the  price.  Thus,  in 
the  illustration  given,  an  exchange  between  the 
owner  of  the  horse  and  the  owner  of  the  land 
would  not  take  place  if  the  character  of  the  horse  or 
of  the  land  did  not  suit  the  would-be  purchaser; 
nor  would  there  be  an  exchange  if  the  owners  did 
not  agree  as  to  the  relative  values  of  the  horse  and 
of  the  land,  even  though  the  one  desired  a  piece  of 
land  more  than  his  horse  and  the  other  preferred 
a  horse  to  his  piece  of  land. 

86.  The  fulfillment  of  the  first  of  these  condi- 
tions depends  primarily  upon  the  accuracy  with 
which  individuals  in  producing  with  a  view  to  meet- 
ing the  wants  of  others,  forecast  those  wants  and 
adjust  their  production  thereto.  But  it  may  hap- 
pen that,  even  when  the  commodities  produced 
are  desired,  an  exchange  will  be  prevented  through 
an  absence  of  the  necessary  coincidence  of  desires. 
To  illustrate,  one  person,  A,  with  meat  to  sell,  may 
desire  clothing;  another,  B,  with  clothing  to  sell, 
may  desire  fuel;  a  third,  C,  with  fuel  to  sell,  may 
desire  meat.  As  the  case  stands,  there  does  not 
exist  the  double  coincidence  of  desires  necessary  to 
effect  an  exchange.  But  if  the  owner  of  meat,  A, 
knows  that  C,  who  has  fuel  to  sell,  wants  meat, 
while  B,  who  has  clothing  to  sell,  wants  fuel,  A 
may  exchange  his  meat  with  C  for  fuel,  and  then 
exchange  this  with  B  for  clothing.  Fuel  becomes 
to  A  the  medium  through  which  a  double  coinci- 
dence of  desires  is  established,  first  between  him- 


EXCHANGE  189 

self  and  C,  and  then  between  himself  and  B.  This 
is  typical  of  a  condition  that  often  arises  in  mod- 
ern industrial  society,  where  it  is  seldom  that  both 
of  the  parties  to  an  exchange  have  final  desires  for 
the  commodity  possessed  by  the  other.  As  in  the 
illustration,  the  obstacle  to  an  exchange  that  would 
otherwise  exist,  is  commonly  removed  by  the  use  of 
a  medium  of  exchange. 

The  essential  function  of  a  medium  of  exchange 
is  to  supply  a  double  coincidence  of  desires.  In 
order  that  a  thing  should  perform  this  function  it 
must  possess  such  characteristics  as  will  enable  the 
person  receiving  it  to  secure  that  which  he 
desires  through  its  use.  Or,  to  state  this  as  a 
general  principle,  to  serve  as  a  medium  of 
exchange,  a  thing  must  possess  the  power  to 
command  property  in  commodities.  The  reason 
is  obvious.  An  individual  is  willing  to  ex- 
change his  commodity  for  something  which  he 
does  not  desire  for  itself,  provided  it  will  en- 
able him  to  secure  that  which  he  does  so  desire. 
Out  of  the  use  of  a  medium  of  exchange  arise 
numerous  questions  as  to  the  best  way  to  supply  it. 
From  various  causes,  it  may  vary  in  its  power  to 
command  property  in  commodities,  i.  e. ,  in  its  pur- 
chasing power,  and  such  variations  affect  vitally 
the  shares  received  by  members  of  society.  For 
the  present  discussion,  however,  it  suffices  (1)  to 
describe  the  function  of  a  medium  of  exchange  in 
the  general  economic  process,  which  consists  in 
facilitating  the  operation  of  buying  and  selling  by 


190  THEORY  OF  ECONOMICS 

assisting  to  secure  a  double  coincidence  of  desires 
and  (2)  to  state  the  requisite  for  performing  that 
function,  which  is  the  possession  of  power  to  com- 
mand property  in  commodities. 

Another  method  of  obviating  the  difficulties 
involved  in  securing  a  double  coincidence  of  desires, 
is  by  the  use  of  credit,  though  an  exchange  on  the 
basis  of  credit  is,  in  reality,  an  incomplete  ex- 
change. In  modern  business,  as  has  already  been 
pointed  out,  credit  has  become  an  important  factor 
in  the  process  of  transferring  ownership  in  com- 
modities; according  to  conservative  estimates,  from 
80  to  90  per  cent,  of  the  entire  volume  of  trade  is 
carried  on  by  its  use.  Under  such  circumstances 
the  conditions  essential  to  the  maintenance  of  credit 
become  of  the  highest  importance. 

In  a  well  ordered  society,  whose  legal  machinery 
provides  adequate  facilities  for  the  enforcement  of 
contracts,  the  most  important  requisite  for  efficient 
credit  is  stability  in  the  value  of  that  which  soci- 
ety establishes  as  a  legal  tender,  i.  <?.,  that  whose 
payment  society  recognizes  as  a  fulfillment  of  the 
obligation  involved  in  a  contract.  For  instability 
in  the  value  of  the  legal  tender  introduces  uncer- 
tainty as  to  the  ultimate  result  of  credit  transactions 
and  invariably  leads  to  a  contraction  of  the  use  of 
credit.  If  the  value  of  the  legal  tender  increases,  debt- 
ors are  obliged  to  give  in  payment  of  obligations  a 
greater  amount  than  was  contemplated  when  the 
contracts  were  made;  and  if  the  value  of  the  legal 
tender  decreases,  there  is  an  opposite  result,  the 


EXCHANGE  191 

debtor  becomes  able  to  meet  his  obligations  with 
less  value  than  was  contemplated.  In  the  former 
case  the  creditor  gains  at  the  expense  of  the  debtor; 
and  in  the  latter  case,  the  debtor  gains  at  the 
expense  of  the  creditor,  both  of  which  results  seri- 
ously impair  the  efficiency  of  the  economic  process. 

87.  But  even  though  the  commodity  possessed 
by  each  of  two  parties  suits  the  other  so  far  as  its 
character  is  concerned,  an  exchange  will  not  take 
place  unless  an  agreement  is  reached  as  to  the  rela- 
tive values  of  the  two  commodities,  i.  e.,  as  to  the 
price  of  each.  An  agreement  by  two  parties  as  to 
the  price  in  a  proposed  exchange  of  commodities 
depends  upon  the  status  of  the  alternatives  that  are 
available  to  each ;  for,  in  deciding  upon  the  ques- 
tion of  price,  preliminary  to  an  exchange,  the  mat- 
ter presents  itself  to  each  of  the  parties  as  a  choice 
between  alternatives.  Each  may  either  (1)  accept 
the  estimate  of  the  relative  values  of  the  commod- 
ities made  by  the  other,  or  (2)  seek  an  exchange 
with  someone  else  offering  more  favorable  terms,  or 
(3)  retain  his  commodity  for  his  own  use. 

The  availability  and  desirability  of  these  alterna- 
tives depend  upon  a  variety  of  conditions.  As 
division  of  function  increases,  thereby  limiting  the 
range  of  each  one's  operations  within  narrower 
bounds,  the  availability  of  the  third  alternative, 
i.  e.,  the  use  of  one's  commodity  by  himself, 
diminishes,  for  the  supply  of  that  .which  each  pro- 
duces tends  to  exceed  w7hat  he  requires  for  his  own 
use.  If  the  character  of  the  commodity  is  such  as 


192  THEORY  OF  ECONOMICS 

to  necessitate  further  manufacture  to  fit  it  for  final 
consumption,  or  if  its  durability  is  so  limited  as  to 
require  its  immediate  use,  the  disposition  to  accept 
almost  any  terms  rather  than  not  exchange  will  be 
very  great.  Indeed,  if  the  commodity  is  not  one 
that  ministers  to  life,  and  its  exchange  is  the  only 
way  by  which  its  owner  can  obtain  the  necessities 
of  life,  the  pressure  to  exchange  becomes  practi- 
cally compulsion,  and  the  proposed  terms  must  be 
accepted  or  others  found  that  are  better.  The  avail- 
ability of  the  second  alternative  depends  upon 
whether  another  party  can  be  found  who  places  a 
relatively  lower  estimate  upon  the  value  of  his  com- 
modity. This  is  but  to  say,  in  substance,  that  the 
availability  of  the  second  alternative  depends  upon 
the  supply  of  and  the  demand  for  the  commodities 
concerned.  Indeed,  the  entire  problem  of  the 
availability  and  desirability  of  alternatives  in  ex- 
change rests  upon  the  supply  of  and  the  demand 
for  commodities.  The  question  is  primarily  one  of 
value. 

88.  The  status  of  alternatives  in  exchange  is  of 
the  highest  importance  in  distribution.  As  has 
been  said,  they  determine  in  part  whether  in  any 
given  case  a  prospective  exchange  of  commodities 
will  actually  take  place.  But  more  than  this,  they 
determine  largely  the  effect  of  exchange  upon  the 
distribution  of  wealth;  for  upon  the  alternatives 
available  depends  the  price  at  which  commodities 
exchange  and  upon  the  price  received  depends  the 
effect  of  an  exchange  upon  the  shares  of  the  par- 


EXCHANGE 


ties  thereto.  An  exchange  at  a  relatively  high 
price  means  to  the  seller  a  large  share  and  to  the 
purchaser  a  correspondingly  small  share  of  the 
commodities  exchanged;  while  an  exchange  at  a 
relatively  low  price  means  exactly  the  opposite,  to 
the  seller  a  small  share  and  to  the  purchaser  a  cor- 
respondingly large  share  of  the  commodities  ex- 
changed. One's  share  of  product,  then,  in  so  far 
as  it  is  received  through  exchange,  depends  upon 
his  ability  to  control  the  alternatives  in  connection 
with  exchange. 

To  the  extent  that  one  receives  a  part  or  all 
of  his  share  through  an  exchange  of  commodities, 
the  size  of  his  share  is  determined  by  (1)  the 
amount  of  commodities  sold,  and  (2)  the  price  ob- 
tained; for,  other  things  being  equal,  the  larger 
the  amount  of  one's  sales  and  the  higher  the  price, 
the  larger  is  the  share  received  in  the  distribution 
of  wealth.  It  follows,  then,  that  the  problem  pre- 
sented to  every  man  in  offering  his  commodities  for 
sale,  is  how  to  sell  as  much  as  possible  at  the  high- 
est price  possible.  But  the  amount  of  sales  and  the 
price  obtained  sustain  a  vital  relation  to  each  other. 
The  lower  the  price  of  the  commodity,  /.  <?.,  the 
smaller  the  amount  of  other  commodities  demanded 
in  return  for  it,  the  larger  will  be  the  number  of 
those  willing  to  exchange.  This  is  the  meaning  of 
the  common  statement,  "the  lower  the  price,  the 
greater  the  demand,"  i.  e.,  the  lower  the  price,  the 
larger  is  the  number  of  those  whose  want  is  suffi- 
ciently intense  to  induce  them  to  give  the  amount 


194  THEORY  OF  ECONOMICS 

of  their  own  commodity  necessary  to  effect  an  ex- 
change. On  the  other  hand,  the  lower  the  price, 
the  smaller  is  the  amount  of  product  received  as 
the  result  of  a  given  exchange.  The  efforts  of  in- 
dividuals in  exchanging  commodities  are,  therefore, 
directed  towards  securing  the  largest  extent  of  sales 
and  the  highest  price  which  together  will  give  the 
largest  net  returns. 

89.  If  one  would  extend  his  sales,  he  must  offer 
better  alternatives  than  are  available  elsewhere.  To 
do  this,  he  must  lower  the  price  of  his  commodity, 
or,  what  amounts  to  the  same  thing,  give  a  better 
article  for  the  same  price.  For,  so  far  as  the  pur- 
chaser is  concerned,  the  lower  the  price,  the  more 
advantageous  is  the  exchange,  and  in  seeking  to 
expend  his  energy  for  the  satisfaction .  of  his  wants 
in  the  direction  of  least  resistance,  he  seeks  to  pur- 
chase at  the  lowest  price.  To  the  purchaser,  as  has 
been  seen,  the  question  is  one  of  alternatives  ;  and 
the  more  advantageous  the  alternative  offered  by 
any  one,  the  larger  will  be  the  number  of  pur- 
chasers. 

To  the  extent  that  alternatives  are  available  at 
any  time,  there  exists  rivalry  of  interests  among 
those  offering  them.  To  the  seller,  the  existence 
or  rival  alternatives  presents  an  obstacle  to  the  sat- 
isfaction of  his  wants,  and  his  effort  to  overcome 
that  obstacle,  which  leads  to  a  lowering  of  the 
price,  is  competition.1 

1  Cf .  §  32. 


EXCHANGE  195 

The  degree  of  rivalry  existing  and  the  intensity 
of  the  competition  vary,  because  the  availability  of 
the  alternatives  varies.  The  more  nearly  commod- 
ities resemble  each  other  and  appeal  to  the  same 
want,  the  more  intense  will  be  the  competi- 
tion. Thus  competition  between  sellers  of  wheat 
will  be  more  intense  than  between  sellers  of  wheat 
and  sellers  of  meat,  but  since  a  purchase  of  either 
one  of  these  two  commodities  may  prevent  a  pur- 
chase of  the  other,  there  is  some  competition  be- 
tween those  offering  them  for  sale.  In  like  man- 
ner, though  in  different  degrees,  there  is  competi- 
tion between  both  the  sellers  of  wheat  and  of  meat, 
on  the  one  hand,  and  the  sellers  of  books,  on  the 
other.  Wheat  and  meat  being  food  products, 
the  competition  between  different  sellers  of  wheat 
or  of  meat,  or  between  the  sellers  of  wheat 
and  of  meat,  will  be  more  intense  than  the 
competition  between  the  sellers  of  those  com- 
modities and  the  sellers  of  books.  But  since 
a  purchase  of  wheat  or  of  meat  may  prevent 
a  purchase  of  books,  and,  vice  versa,  a  purchase  of 
books  may  prevent  a  purchase  of  wheat  or  of  meat, 
there  is  some  competition,  not  only  between  farm- 
ers, and  between  farmers  and  butchers,  but  also 
between  farmers  and  butchers,  on  the  one  hand, 
and  book-sellers,  on  the  other.  The  extent  of  com- 
petition depends  upon  the  amount  and  character  of 
the  existing  alternatives.  So  me  competition,  however, 
is  present  and  effective  to  the  extent  that  any  alter- 
native is  available. 


196  THEORY  OF  ECONOMICS 

The  effect  of  competition  between  sellers  is 
to  lower  prices.  The  extent  to  which  competition 
will  be  carried  and  prices  lowered,  depends  upon 
the  nature  of  the  interests  involved.  It  will  cease 
normally  when  price  reaches  the  lowest  point  that 
will  suffice  to  induce  the  production  of  the  com- 
modity, for  at  that  point  alternatives  tend  to  be 
withdrawn.  If  a  fair  return  above  the  expense  of 
production  be  included  in  cost  of  production, 
cost  of  production  may  be  said  to  determine  the 
normal  limit  to  downward  movements  in  price.  To 
carry  price  lower  than  this  would  result  in  a  los's, 
and  rather  than  submit  to  that  an  individual  will 
transfer  his  attention  to  the  production  of  some 
other  commodity  which  seems  to  offer  better  pros- 
pects of  reward.  Here,  then,  is  the  relation  sus- 
tained by  cost  of  production  to  value.  It  is  not 
the  basis  of  value,  but  through  price,  which  is  value 
expressed  in  terms  of  a  measure,  cost  of  production 
sets  a  limit  below  which  value  will  not  normally 
fall. 

But  competition  may  force  price  below  the 
normal  limit.  In  the  case  of  the  so-called  perma- 
nent investments,  as  of  fixed  capital  in  a  railroad 
and  other  similar  enterprises,  the  transfer  of  which 
to  other  industries  is  difficult  or  impossible,  compe- 
tition may  force  price  down  to  a  point  where  the 
returns  but  little  more  than  suffice  to  pay  the  cur- 
rent expenses  of  operating  the  business.  For  con- 
ditions may  arise  in  which  the  choice  lies  between 
such  small  returns  and  nothing  at  all.  Indeed, 


EXCHANGE  197 

hoping  for  better  conditions  in  the  future,  price 
may  fall  temporarily  even  lower  than  this.  But 
competition  that  drives  price  lower  than  cost  of 
production  cannot  be  permanent.  For,  as  has  been 
said,  investments  will  cease  to  be  made  in  an  indus- 
try where  such  conditions  arise ;  when,  therefore, 
existing  facilities  for  production  along  such  lines 
are  exhausted,  the  former  supply  of  alternatives 
will  no  longer  be  provided  and  competition  will  de- 
crease. Still,  the  character  of  the  industry  may  be 
such  that  much  time  must  elapse  before  present 
facilities  are  exhausted,  hence  the  competition  that 
carries  price  below  the  limit  of  profitable  industry 
may  be  long  continued  and  work  great  injury  to 
economic  interests  in  general. 

90.  The  extent  of  the  individual's  sales,  then, 
depends  upon  his  ability  to  offer  through  lower 
prices,  more  advantageous  terms  than  can  be 
secured  elsewhere,  and  so  long  as  other  alternatives 
are  available,  competition  forces  prices  down.  But 
one's  share  in  product  may  sometimes  be  increased 
in  another  way,  i.  e. ,  through  raising  the  price  of 
the  commodity  offered  for  sale.  Moreover,  the 
same  impulse  that  leads  one  in  general  to  seek  the 
maximum  of  want-satisfaction,  will  lead  the  seller 
of  a  commodity  to  increase  the  price  thereof,  pro- 
vided, by  so  doing,  he  can  increase  his  share  of 
wealth. 

The  availability  of  this  method  of  increasing 
one's  share  depends  upon  the  ability  to  control  the 
supply  of  the  means  for  want-satisfaction,  for  in  so 


198  THEORY  OF  ECONOMICS 

far  as  one  controls  the  supply  of  that  which  is 
required  to  satisfy  wants,  he  lessens  the  pur- 
chaser's ability  to  avail  himself  of  another  alter- 
native and  is  thereby  enabled  to  fix  the  terms 
of  exchange.  Such  power  of  control  on  the  part 
of  the  seller  in  his  contest  with  the  purchaser  over 
the  terms  of  exchange,  is  monopolization.1 

As  with  competition,  monopolization  varies  in 
effectiveness  with  the  nature  of  the  commodity 
concerned.  The  more  nearly  commodities  minister 
to  the  same  want,  the  greater  is  the  necessity  of 
controlling  the  supply  of  all  of  them,  if  prices  are  to 
be  raised.  Thus  gas,  electric  light, oil  and  candles, 
all  minister  to  the  desire  for  light.  Of  these, 
gas  and  electric  light  probably  minister  more 
nearly  to  the  same  want  than  does  any  other  com- 
bination of  them;  while  gas,  electric  light  and  oil 
are  much  preferred  to  candles  for  general  lighting 
purposes.  The  control  of  the  supply  of  gas,  electric 
light  and  oil  would  give  their  possessor  more  power 
to  increase  his  share  by  increasing  price  than  would 
control  over  gas,  electric  light  and  candles,  or  over 
any  other  combination  of  these  commodities.  The 
degree  of  monopolization  depends  upon  the  amount 
of  control  over  the  possible  alternatives.  Some 
monopolization,  however,  is  present  and  effective  to 
the  extent  that  any  such  control  exists. 

The  effect  of  monopolization  on  exchange  is  to 
raise  prices.  It  is  sometimes  said  that  monopoli- 

1  Cf .  3  32. 


EXCHANGE  199 

zation  lowers  prices,  and  instances  are  cited  where 
the  growth  of  large  industries  has  resulted  in  reduc- 
tion in  price.  But  to  the  extent  that  individuals 
seek  the  maximum  satisfaction  of  their  wants,  every 
instance  of  a  fall  in  price  will  be  found  due  to  the 
existence  of  competition,  arising  from  the  fact  that 
alternatives  are  available  which  might  be  preferred 
but  for  the  lowering  of  price.  The  view  that  monop- 
olization lowers  price  rests  upon  a  mistaken  idea  of 
what  monopolization  really  is.  Monopolization  is 
not  mere  power  of  control  over  commodities  ;  it  is 
power  of  control  in  its  relation  to  rivals.  The  de- 
gree of  monopolization  is  influenced  but  not  deter- 
mined by  the  absolute  amount  of  commodities  con- 
trolled. If  six  persons  were  on  an  island  without 
the  means  of  communication  with  other  places,  and 
with  only  one  box  of  biscuits  for  food,  the  posses- 
sion of  that  supply  of  biscuits  would  give  its 
owner  an  immense  power  of  control  over  the  con- 
ditions of  their  sale.  But  ownership  of  the 
same  amount  of  biscuits  in  a  country  where 
others  were  available  and  where  supplies  of  other 
kinds  of  food  were  abundant,  would  give  their 
possessor  but  a  slight  control  over  the  conditions 
of  their  sale.  The  degrees  of  monopolization  given 
by  ownership  of  the  same  amounts  of  supply  are 
vastly  different  in  the  two  cases.  In  the  former 
case,  monopolization  approaches  as  near  the  abso- 
lute as  can  be  conceived;  in  the  latter,  it  is  too 
small  to  be  recognized  except  for  scientific  purposes. 
On  the  other  hand,  control  over  a  large  amount  of 


200  THEORY  OF  ECONOMICS 

commodities  does  not  necessarily  result  in  a  high 
degree  of  monopolization,  for  monopolization  is  a 
matter  of  ability  to  control  the  conditions  of  want- 
satisfaction  in  the  presence  of  rival  interests,  and 
the  absolute  amount  of  commodities  controlled 
affects  it  only  as  it  affects  that  power  of  control. 

Monopolization  as  well  as  competition  has  a 
normal  limit  beyond  which,  even  if  there  exists 
power  to  raise  prices,  it  will  not  be  exercised.  This 
normal  limit  is  the  point  beyond  which  the  induce- 
ment of  purchasers  to  produce  their  commodities, 
is  destroyed.  That  point  is  the  cost  of  producing 
those  commodities.  Hence  the  normal  limit  to  up- 
ward movements  in  the  price  of  any  commodity  is 
the  cost  of  producing  other  commodities  which  are 
to  be  given  in  exchange.  For  to  carry  price  beyond 
this  point  involves  an  impairment  of  productive 
efficiency  and,  therefore,  ultimately,  the  defeat  of 
the  end  for  which  prices  are  raised,  i.  e.,  want- 
satisfaction. 

But  though  a  normal  limit  is  thus  set  to  upward 
movements  in  price,  it  is  by  no  means  certain  that, 
in  any  given  case,  the  increase  will  cease  when  price 
reaches  that  point.  Conditions  may  be  such  that 
those  possessing  the  power  of  control  will  not  be 
directly  and  immediately  affected  by  the  evils  of 
excessive  prices.  Under  such  circumstances,  ignor- 
ance of  the  ultimate  effects  of  their  actions  or  an 
absence  of  concern  for  the  social  welfare  in  general, 
may  delay  the  working  of  the  remedy  for  excessive 
prices  which  inheres  in  their  effect  upon  production, 
and  result  in  much  damage. 


EXCHANGE  201 

91.  From  the  foregoing  analysis  of  the  conditions 
determining  the  increase  and  decrease  of  prices,  there 
follows  the  law  of  price:  the  price  of  a  commodity  in 
exchange  is  the  resultant  of  the  influence  of  competi- 
tion and  monopolization ,  falling  as  competition  pre- 
vails and  rising  as  monopolization  prevails. 

The  normal  limit  to  the  downward  movement 
in  the  price  of  any  commodity  is  its  cost  of  pro- 
duction, because  the  disposition  of  producers  to 
cease  providing  a  supply  of  commodities  when  price 
reaches  that  point,  by  lessening  the  availability  of 
alternatives,  gives  to  those  still  offering  the  com- 
modity for  sale  an  increased  power  to  control  price. 
In  other  words,  in  the  contest  between  competitive 
and  monopolistic  influences,  the  latter  tends  to  pre- 
vail and  to  prevent  further  reduction  in  price  wrhen 
price  falls  to  cost  of  production. 

The  normal  limit  to  upward  movements  in  price 
is  the  cost  of  producing  other  commodities  which 
are  to  be  given  in  exchange,  because  above  that 
point  the  alternative  of  ceasing  to  produce  those 
other  commodities  for  exchange  becomes  preferable 
to  the  terms  of  exchange  offered.  In  other  words, 
in  the  contest  between  the  competitive  and  monop- 
olistic influences,  the  former  tend  to  prevail  over  the 
latter  and  to  prevent  further  in  crease  in  price,  when 
price  reaches  a  point  where  more  is  required  of  the 
purchaser  than  the  cost  of  producing  the  commod- 
ities he  can  offer  in  exchange. 

92.  Thus   far    the    analysis    of   exchange    has 
viewed   the   operation   from   the    standpoint   of   a 


202  THEORY  OF  ECONOMICS 

seller  and  his  relation  to  a  purchaser.  There  are, 
however,  two  parties  to  every  exchange,  and  the 
conditions  attending  the  action  of  one  have  an 
inevitable  effect  upon  the  other.  Hence,  so  long 
as  but  one  of  the  parties  to  an  exchange  and  his 
commodity  are  considered,  the  analysis  is  incom- 
plete. It  should  be  observed,  however,  that  the 
inadequacy  of  such  an  analysis  does  not  arise  from 
the  fact  that  it  views  an  exchange  from  the  stand- 
point of  the  seller  rather  than  from  that  of  the 
purchaser,  but  from  the  fact  that  it  considers  the 
matter  from  the  standpoint  of  but  one  of  the  sellers. 
So  far  as  an  individual's  attitude  of  mind  is  con- 
cerned, buying  and  selling  may  differ,  but  as  eco- 
nomic phenomena  they  are  opposite  ways  of  look- 
ing at  the  same  act.  He  who  is  seeking  to  buy  to 
the  best  advantage  is  seeking  also  to  sell  to  the 
best  advantage  that  which  he  offers  in  exchange. 
To  complete  the  analysis,  then,  it  is  necessary  to 
consider  the  effects  of  an  exchange  in  relation  to 
both  of  the  parties  thereto. 

When  the  price  of  a  commodity  falls,  the  price 
of  the  commodity  offered  in  exchange  by  the 
purchaser  of  the  first  commodity  rises,  and  vice 
versa.  Thus  if  one  bushel  of  wheat  is  exchanged 
for  five  pounds  of  meat,  the  price  of  one  bushel  of 
wheat  is  five  pounds  of  meat,  and  the  price  of  one 
pound  of  meat  is  one-fifth  of  a  bushel  of  wheat. 
If,  now,  because  others  offer  more  advantageous 
terms,  it  becomes  necessary  to  give  two  bushels  of 
wheat  for  five  pounds  of  meat,  the  price  of  wheat 


EXCHANGE  203 

falls ;  the  price  of  a  bushel  of  wheat  becomes  two 
and  one-half  pounds  of  meat.  But  this  involves  a 
rise  in  the  price  of  meat,  the  price  of  one  pound  of 
which  becomes  two-fifths  of  a  bushel  of  wheat.  In 
other  words,  the  competition  between  the  owner  of 
wheat  and  his  rivals  has  increased  the  control  of 
the  owner  of  meat  over  the  price  of  his  commodity. 
But  this  indicates  a  greater  degree  of  monopoliza- 
tion on  the  part  of  the  owner  of  meat,  for  the  power 
of  control  which  results  from  the  weakness  of 
others  is  as  truly  monopolization  as  the  power  of 
control  that  results  from  adding  to  "one's  own 
strength.  Competition,  then,  between  rivals  in  the 
selling  of  commodities  is  one  of  the  methods  by 
which  the  purchasers  thereof  increase  their  monopo- 
lization in  the  sale  of  the  commodities  which  they 
offer  in  exchange. 

On  the  other  hand,  if  the  owner  of  wheat  can  so 
far  control  the  supply  of  wheat  and  its  rival 
commodities  that  he  can  compel  the  owner  of  meat 
to  give  ten  pounds  of  meat  for  one  bushel  of  wheat, 
the  price  of  one  bushel  of  wheat  becomes  ten  pounds 
of  meat,  and  the  price  of  one  pound  of  meat  be- 
comes one-tenth  of  a  bushel  of  wheat.  This  means 
that  monopolization  by  the  sellers  of  wheat  and 
its  rival  commodities  has  increased  the  intensity 
of  the  rivalry  against  which  the  owner  of 
meat  is  obliged  to  contend,  that  is  to  say, 
it  has  increased  the  competition  he  has  to  meet. 
Monopolization  by  the  sellers  of  a  commodity  is, 
then,  one  of  the  methods  by  which  the  com- 


204  THEORY  OF  ECONOMICS 

petition  to  which  purchasers  are  subject  in  the  sale 
of  their  commodities,  is  increased.  Competition 
and  monopolization  in  their  relation  to  the  ex- 
change of  commodities  are  opposing  and  insepara- 
ble manifestations  of  economic  activity.1 

93.  The  fact  that  an  increase  in  the  price  of  one 
commodity  in  an  exchange  involves  a  decrease  in 
the  price  of  the  other  commodity,  and  vice  versa, 
has  an  important  bearing  also  upon  the  relation  of 
the  shares  of  the  parties  concerned  to  each  other. 
The  immediate  effect  of  a  movement  in  price  is  to 
increase  the  share  of  one  and  to  decrease  the  share 
of  another.  Thus,  if  the  price  of  one  bushel  of 
wheat  is  five  pounds  of  meat,  an  exchange  on  that 
basis  results  in  one  man  parting  with  one  bushel  of 
wheat  and  receiving  five  pounds  of  meat,  while  the 
other  parts  with  five  pounds  of  meat  and  receives 
one  bushel  of  wheat.  But  if  the  price  of  one  bushel 
of  wheat  increases  to  ten  pounds  of  meat,  an  ex- 
change gives  to  the  man  who  parts  with  one  bushel 
of  wheat,  ten  pounds  of  meat,  while  he  who  parts 
with  five  pounds  of  meat  receives  but  one-half  a 
bushel  of  wheat. 

The  advantages  or  disadvantages  resulting  to 
one  through  a  change  in  the  prices  of  commod- 
ities may  be  offset  in  the  end  wholly  or  partly 
by  the  subsequent  effect  of  that  change  upon 
the  other  party.  Thus  if  an  increase  in  the 
price  of  a  commodity  so  far  diminishes  the 

JCf.  §33. 


EXCHANGE  205 

amount  received  by  the  purchaser  thereof,  as  to 
decrease  his  productive  efficiency,  the  first  party 
to  the  exchange  may  suffer  as  a  result  of  diminished 
production.  On  the  other  hand,  the  disadvantage 
resulting  to  one  through  a  decrease  in  price  may  be 
offset  by  an  increase  in  sales,  or  by  the  increased 
productivity  of  the  other  party  to  the  exchange, 
who,  now  that  he  receives  a  larger  return,  may  feel 
an  increased  inducement  to  act.  But  whether  these 
changes  in  production  affect  him  who  gains  or  loses 
by  a  rise  or  fall  in  the  price  of  his  commodity,  de- 
pends upon  whether  subsequent  exchanges  diminish 
or  increase  his  share. 

From  the  relation  of  the  terms  of  exchange 
to  the  shares  received  by  the  parties  thereto,  it  fol- 
lows that,  in  any  given  case,  exchange,  or  as  it  ts 
often  designated,  trade,  is  not  necessarily  of  equal 
advantage  to  both  parties.  Indeed,  although  un- 
der the  circumstances  existing  at  the  time,  each  of 
the  parties  to  an  exchange  must  receive,  or  think 
that  he  will  receive,  some  benefit,  otherwise  the 
exchange  would  not  take  place;  still,  if  the  ex- 
change results  in  giving  to  either  of  the  parties  less 
than  was  expended  by  him  in  production,  or  less 
than  he  might  have  received  had  the  division  of 
function  which  gave  rise  to  the  exchange,  not  taken 
place,  the  ultimate  result  of  the  operation  is  to  that 
party  a  loss. 

The  relative  distribution  of  benefits  in  an  ex- 
change depends  entirely  upon  the  relative  degrees 
to  which  competition  and  monopolization  prevail  in 


206  THEORY  OF  ECONOMICS 

connection  with  the  respective  parties.  To  the  ex- 
tent that  one  is  subject  to  competition  in  determin- 
ing the  conditions  of  exchange,  his  share  decreases, 
and  the  share  of  the  other  party  increases,  at  least 
until  competition  shall  have  gone  so  far  as  to  impair 
productive  efficiency.  On  the  other  hand,  to  the  ex- 
tent that  one  can  avail  himself  of  monopolization, 
his  share  increases,  while  the  share  of  the  other 
party  decreases,  until  excessive  monopolization  im- 
pairs production.  Healthy  trade  depends  upon  a 
proper  balancing  of  the  competitive  and  monopolistic 
influences* 

94.  The  analysis  of  the  effect  of  price  on  the 
shares  received  by  individuals  has  been  illustrated 
by  cases  in  which  exchange  is  made  without  the  use 
of  a  medium  of  exchange.  The  employment  of  a 
medium  of  exchange,  however,  though  affecting 
materially  the  extent  to  which  exchanges  take 
place,  in  no  wray  alters  the  fundamental  principles 
involved.  The  advantage  of  analyzing  exchange 
as  it  proceeds  in  the  absence  of  a  medium  of  ex- 
change lies  in  the  fact  that  certain  concepts  associ- 
ated with  a  medium  of  exchange  tend  to  obscure 
the  essential  character  of  the  process.  In  the  lan- 
guage of  the  market,  selling  is  usually  thought  of 
as  an  exchange  of  some  general  commodity  for  a 
medium  of  exchange,  or  money  as  it  is  com- 
monly called.  Hence,  in  selling  wheat,  for  exam- 
ple, it  does  not  appear  that  one  man  sells  wheat  and 
buys  a  medium  of  exchange, — gold,  silver,  copper, 
paper  or  whatever  serves  that  purpose, — while  the 


. 


o* 


EXCHANGE  207 

other  sells  the  medium  of  exchange  and  buys 
wheat.  Yet  such  is  the  case,  and  failure  to  recog- 
nize the  fact  leads  to  erroneous  ideas  as  to  the  func- 
tion of  a  medium  of  exchange.  There  may  be  and 
usually  is  a  difference  between  the  want  that  gives 
value  to  wheat  and  the  want  that  gives  value  to  a 
medium  of  exchange.  The  former  is  wanted  for 
personal  consumption  or  for  use  in  production, 
while  the  latter  is  wanted  to  secure  something  else 
that  may  be  used  for  personal  consumption  or  in 
production.  But  in  an  exchange  of  a  commodity 
for  a  medium,  both  are  bought  and  both  are  sold. 
The  main  difference  between  an  exchange  where  a 
medium  is  employed  and  one  where  commodities 
are  exchanged  for  each  other  directly,  lies  in  the 
fact  that  in  the  former  case  two  exchanges  are 
necessary,  where  in  the  latter,  one  suffices. 

The  essential  character  of  an  exchange  is  still 
further  concealed,  when  the  same  commodity  serves 
to  perform  the  functions  both  of  a  medium  of  ex- 
change and  of  a  standard  measure  of  value,  as  is 
now  the  case  with  gold  in  the  United  States  and 
silver  in  Mexico.  Here,  as  elsewhere,  price  is 
determined  by  comparing  the  values  of  the  two 
commodities  exchanged,  but  only  one  is  thought  of 
as  a  commodity.  Under  these  circumstances,  to 
discover  the  real  nature  of  an  exchange,  it  becomes 
almost  indispensable  to  revert  to  the  simple  case 
in  which  commodities  are  exchanged  for  each  other 
directly  and  their  prices  are  determined  by  a  com- 
parison of  their  values  with  each  other. 


208  THEORY  OF  ECONOMICS 

The    foregoing   consideration  of    the  process  of 
exchange  leads  to  the  following  conclusions  :— 

(1)  Under  division  of  function,  as  society  is  now 
organized,  the  share  of  each  member  of  society  is 
received  wholly  or  in  part  through  an  exchange  of 
commodities. 

(2)  In  so  far  as  the  share  of  any  one  is  secured 
through  exchange,  the  size  of  the  share  depends 
upon  the  amount  sold  and  the  price  obtained. 

(3)  Price,  which  is  value  expressed  in  terms  of  a 
measure,  falls  when  competition  prevails,  and  rises 
when  monopolization  prevails,  being,  in  any  given 
case,  the  resultant  of  these  opposing  manifestations 
of  activitjr. 

(4)  Healthy  trade  and,  therefore,   efficient  dis- 
tribution, require  that  competition  and  monopoliza- 
tion should  be  properly  balanced. 


THE  SHARES  IN  DISTRIBUTION 


95.  As  has  been  seen,  in  society  under  its  pres- 
ent organization,  product  is  distributed  mainly  on 
the  basis  of  value  of  services.  In  so  far  as  differ- 
entiation in  the  ownership  of  the  factors  of  produc- 
tion,— situation,  capital,  enterprise  and  labor, — 
exists,  there  result  distinct  shares  corresponding 
to  each,  so  that  were  ownership  in  these  factors 
wholly  differentiated,  there  would  be  four  distinct 
shares.  These  are  designated  respectively  rent, 
interest,  profits  and  wages.  These  terms  serve 
to  distinguish  the  several  shares  from  each 
other  and  also  to  distinguish  the  amount  that 
is  given  in  exchange  for  the  use  of  the  fac- 
tors from  that  given  in  exchange  for  the  factors 
themselves,  in  case  of  a  transfer  of  ownership,  as 
where  situation  and  capital  are  bought  and  sold. 
In  this  connection  it  is  necessary  to  guard  against 
the  tendency  to  consider  rent,  interest,  profits  and 
wages,  not  only  as  distinct  funds,  but  also  as  dis- 

Walker,  Political  Economy,  Pt.  IV.,  chapters  i.,  vii.;  Ely, 
Outlines  of  Economics,  Bk.  II.,  Pt.  III.;  Gide,  Political 
Economy,  trans.,  Bk.  IV.,  Pt.  II.;  Mill,  Principles  of  Polit- 
cal  Economy,  Bk.  II.,  chapter  iii. 

209 


210  THEORY  OF  ECONOMICS 

tinct  kinds  of  funds.  They  are  but  special  terms 
to  designate  the  portions  of  product  that  go  to  the 
owners  of  the  several  factors  of  production,  and  a 
full  appreciation  of  this  fact  will  assist  in  under- 
standing both  the  relation  of  the  shares  to  each 
other  and  the  principles  determining  them. 

In  actual  business,  these  shares,  considered 
purely  as  returns  for  the  respective  factors,  sel- 
dom or  never  appear  entirely  separate  from  each 
other,  because  absolute  differentiation  in  the 
ownership  of  the  factors  seldom  or  never  ap- 
pears. Still  it  is  important  to  consider  each 
of  these  shares  by  itself  in  order  to  ascertain 
what  it  would  be,  if  it  were  wholly  distinct  from 
the  others.  This  will  throw  light  upon  the  princi- 
ples determining  the  shares  actually  received  by  the 
social  classes,  which  represent  more  or  less  com- 
pletely differentiated  ownership  in  the  factors. 

96.  The  first  requisite  for  ascertaining  the  laws 
which  regulate  the  amount  of  the  several  shares,  is 
to  arrive  at  a  clear  understanding  of  what  it  is  that 
is  to  be  distributed.  To  this  end,  it  may  be  well  to 
recall  that  distribution  is  part  of  the  general  eco- 
nomic process,  and  that  the  necessity  for  distribution 
arises  from  the  fact  that  men  cooperate  to  produce 
the  means  to  satisfy  wants.  The  natural  and  cor- 
rect inference  from  this  is  that  the  fund  to  be  dis- 
tributed consists  of  the  output  of  production.  The 
question  here  raised  is,  what  are  the  relative 
amounts  of  this  output  that  go  to  the  owners  of 
the  several  factors. 


THE  SHARES  IN  DISTRIBUTION        211 

But  in  the  process  of  production,  economic  energy 
is  expended  and  if  the  efficiency  of  production  is 
to  be  maintained,  the  energy  expended  must  be 
renewed.  The  further  queston  arises,  then,  as  to 
whether  the  inquiry  concerns  the  distribution  of 
total  product  or  only  of  a  net  product  which  re- 
mains after  deducting  that  which  is  necessary  to 
restore  the  efficiency  of  the  factors. 

Whether  or  not  it  is  held  to  be  a  matter  of 
indifference  to  take,  as  the  fund  whose  distribu- 
tion is  to  be  analyzed,  total  product  or  net  product, 
it  is  clear  that  one  or  the  other  should  be  selected. 
Scientifically,  it  is  not  permissible  to  include  in 
some  of  the  shares  only  the  net  returns  above  the 
expense  of  renewing  the  corresponding  factors,  and 
then  to  compare  such  shares  with  others  from 
which  no  such  deduction  has  been  made.  For  ex- 
ample, interest  is  commonly  considered  to  include 
only  the  amount  that  goes  for  the  services  of  capital 
over  and  above  what  is  used  to  maintain  the  capital 
fund  unimpaired,  while  wages  are  considered  to  in- 
clude the  entire  return  to  the  owner  of  labor,  no 
deduction  being  made  for  the  amount  required  to 
restore  the  strength  and  efficiency  of  the  laborer. 
To  place  the  law  governing  the  net  return  to  the 
owner  of  capital  in  the  same  class  with  the  law 
governing  the  gross  return  to  labor  is  illogical. 
The  matter  will  be  much  simplified  if  the  attention 
is  directed  at  once  to  total  product,  so  that  the 
question  becomes  one  of  ascertaining  the  laws  that 
govern  the  distribution  of  total  product  among  the 


212  THEORY  OF  ECONOMICS 

owners  of  the  four  factors,  situation,  capital,  enter- 
prise and  labor.  Total  product  will  then  equal  the 
sum  of  rent,  interest,  profits  and  wages.1 

Furthermore,  in  seeking  the  principles  of  dis- 
tribution, the  several  shares  should  be  viewed 
purely  as  returns  for  the  services  of  the  correspond- 
ing factors  of  production.  The  results  so  obtained 
may  afterwards  be  compared  with  the  funds  to 
which  the  terms  rent,  interest,  profits  and  wages 
are  applied  in  general  business  intercourse.  To 
avoid  confusion,  the  terms  rent,  interest,  profits 
and  wages,  qualified  where  it  may  seem  necessary 
by  "economic,"  as  "economic  rent,"  "economic 
interest,"  etc.,  will  be  employed  in  referring  to 
the  shares  viewed  from  the  standpoint  of  economic 
theory,  while  the  terms  "commercial  rent,"  "  com- 
mercial interest,"  etc.,  will  be  employed  in  refer- 
ring to  these  shares  as  they  appear  in  actual  busi- 
ness. 

97.  The  amount  of  each  share  under  the  pre- 
vailing system  of  distribution,  depends  primarily 
upon  the  value  of  the  services  of  the  factors, 
which,  in  turn,  depends  upon  the  relation  of  the 

1  Taxes,  which  are  sometimes  added  as  a  fifth  share,  are 
in  fact  paid  out  of  what  has  been  received  as  rent,  interest, 
profits  or  wages.  Where  the  state  reserves  a  portion  of  the 
product  before  the  individual  members  of  society  receive 
their  shares,  either  it  does  so  as  the  owner  of  one  or  more  of 
the  factors  of  production  or  it  adopts  this  method  of  collect- 
ing revenue  from  its  citizens  by  levying  upon  income  at  its 
source.  Cf .  Walker,  Political  Economy,  p.  272. 


THE  SHARES  IN  DISTRIBUTION        213 

supply  of  the  services  of  the  several  factors  to  the 
demand  therefor.  Thus,  rent  depends  upon  the 
relation  of  the  supply  of  the  services  of  situation 
to  the  demand  therefor  ;  interest,  upon  the  relation 
of  the  supply  of  the  services  of  capital  to  the  de- 
mand therefor  ;  profits,  upon  the  relation  of  the 
supply  of  the  services  of  enterprise  to  the  demand 
therefor  ;  and  wages,  upon  the  relation  of  the  sup- 
ply of  the  services  of  labor  to  the  demand  therefor. 
For  the  principle  that  applies  to  the  value  of  the 
services  of  the  factors  of  production,  differs  in  no 
respect  from  the  principle  according  to  which  value 
in  general  is  determined.  Furthermore,  if  the  sup- 
ply of  the  services  of  any  factor  increases  relative 
to  the  demand  therefor,  the  value  of  those  services 
will  decrease,  and  if  the  supply  decreases  relative  to 
the  demand  therefor,  the  value  will  increase.  As 
with  commodities  in  general,  the  supply  at  any 
time  is  not  the  amount  in  existence  ;  it  is  the 
amount  actually  available  under  given  conditions. 
On  the  other  hand,  the  demand  is  not  the  indefinite 
want  for  services  in  general,  but  the  specific  want 
for  the  services  of  the  factors  actually  existing 
under  the  prevailing  conditions. 

The  value  of  the  services  of  the  factors  being 
determined  by  the  relation  of  the  supply  of  each  to 
the  demand  therefor,  the  return  to  the  owner  of 
any  factor,  in  so  far  as  its  services  are  sold,  de- 
pends upon  the  conditions  determining  the  rate  of 
sale,  i.  £. ,  the  price.  Price  is  the  resultant  of  the 
workings  of  competition  and  monopolization.1  The 

1See  §91. 


214  THEORY  OF  ECONOMICS 

amount,  then,  of  product  that  will  go  to  the  owners 
of  the  several  factors  through  exchange,  depends 
upon  the  relative  extent  to  which  they  are  subject 
to  the  influences  of  competition  and  monopolization. 
In  so  far  as  competition  prevails  in  connection  with 
the  sale  of  the  services  of  any  factor,  i.  e. ,  in  so  far 
as  alternatives  exist  that  may  be  preferred  to  it,  the 
share  accruing  to  its  owner  will  decrease  ;  in  so  far 
as  monopolization  prevails,  i.  e.,  in  so  far  as  the 
owner  of  any  factor  controls  the  alternatives  that 
might  be  preferred^  the  share  accruing  to  him  will 
increase. 

These,  then,  are  the  principles  which  determine 
the  amount  of  rent,  interest,  profits  and  wages. 
There  exists  a  certain  amount  to  be  divided,  /.  e. , 
total  product.  This  is  determined  by  the  efficiency 
of  production.  The  relative  amounts  which  the 
owners  of  situation,  capital,  enterprise  and  labor 
receive  for  the  services  of  their  factors,  depend 
upon  the  status  of  competition  and  monopolization. 
If  the  amount  produced  by  a  given  quantity  of  the 
factors  of  production  is  ten  bushels  of  wheat,  the 
proportion  of  the  wheat  which  will  become  rent, 
interest,  profits  and  wages,  depends  upon  the  ex- 
tent to  which  competition  and  monopolization  pre- 
vail in  connection  with  the  sale  of  the  services  of 
the  factors.  Thus  if,  in  a  given  case,  the  laborers 
possess  a  large  control  over  the  sale  of  their  serv- 
ices, either  because  the  supply  of  labor  is  small  or 
because  the  owners  thereof  act  together  in  its  sale, 
while,  on  the  other  hand,  rivalry  exists  between 


THE  SHARES  IN  DISTRIBUTION        215 

the  owners  of  situation  because  its  supply  is  large, 
it  being  in  the  main  a  matter  of  indifference  to  the 
producer  whether  this  or  that  situation  is  secured, 
the  influence  of  monopolization  will  tend  to  prevail 
in  determining  the  share  of  labor,  while  the  influ- 
ence of  competition  will  tend  to  prevail  in  deter- 
mining the  share  that  goes  for  the  use  of  situation, 
/.  e. ,  the  owner  of  labor  will  secure  a  relatively 
large  share  of  the  total  product  and  the  owner  of 
situation  a  relatively  small  share.  Under  opposite 
conditions  as  to  the  availability  of  labor  and  situa- 
tion, the  share  of  labor  will  be  relatively  small  and 
that  of  situation  relatively  large.  The  same  is 
true  of  the  relation  of  each  of  the  shares  to  the 
others. 

Furthermore,  the  same  principle  applies  in  deter- 
mining the  distribution  of  any  increase  in  product. 
If  by  the  application  of  increased  amounts  of  one 
or  more  of  the  factors  or  by  better  organization  of 
industry,  the  amount  of  wheat  produced  is  increased 
to  twelve  bushels,  the  extent  to  which  the  shares 
will  be  affected,  is  determined  by  the  extent  to 
which  the  owrners  of  the  several  factors  are  sub- 
jected to  competition  and  monopolization ;  the  ad- 
vantage flowing  towards  monopolization  and  away 
from  competition.  And  the  same  is  true  of  the 
distribution  of  an  increase  in  the  value  of  the  out- 
put that  results  from  an  increased  demand  for  the 
commodity.  If  the  value  of  an  output  of  ten 
bushels  of  wheat  becomes  $12.00  instead  of  $10.00, 
as  a  result  of  an  increased  demand  for  wheat,  the 


216  THEORY  OF  ECONOMICS 

distribution  of  this  extra  value  is  determined  by 
the  same  principles  that  operate  in  determining 
the  distribution  of  an  increase  in  the  amount  of 
wheat. 

98.  As  is  the  case  with  exchange  in  general,  so 
with  the  shares  which  are  the  returns  for  the  serv- 
ices of  the  factors,  there  are  normal  minimum  and 
maximum  limits  beyond  which  these  shares  ordinar- 
ily will  not  go.  The  principles  which  apply  here 
are  essentially  the  same  as  those  which  apply  in 
the  case  of  general  prices.  The  problem  is  this  :— 
Given  a  product  that  is  to  be  divided  among  the 
owners  of  situation,  capital,  enterprise  and  labor, 
through  the  sale  of  the  services  of  these  factors, 
what  are  the  minimum  and  maximum  amounts  that, 
under  normal  conditions,  can  be  secured  by  each  ? 

The  minimum  limit  to  each  share  is  the  smallest 
amount  that  will  suffice  to  induce  the  owner  thereof 
to  allow  the  use  of  his.  factor.  To  the  extent  that 
the  employment  of  any  factor  in  production  involves 
an  impairment  of  its  efficiency,  the  owner  thereof 
will  not,  under  ordinary  circumstances,  allow  its 
use  for  less  than  will  suffice  to  renew  its  efficiency. 
Indeed,  this  minimum  limit  is  set  by  the  necessities 
of  production,  which  require  the  restoration  of  the 
energy  expended  as  a  condition  of  continued  effi- 
ciency. Continued  use  of  a  factor  without  renewal 
of  its  productive  capacity  would  in  the  end  destroy 
the  factor  and  defeat  the  end  of  the  economic  proc- 
ess by  destroying  power  to  produce. 

The  maximum  limit  of  the  share  which  the  owner 


THE  SHARES  IN  DISTRIBUTION         217 

of  any  factor  can  secure  under  normal  conditions  is 
the  difference  between  the  total  product  and  the 
sum  of  the  minimum  limits  of  the  other  shares. 
Given  the  minimum  limits  of  the  shares,  the  max- 
imum limit  of  any  share  is  determined  by  a  simple 
mathematical  computation.  The  most  that  is  avail- 
able for  distribution  under  any  circumstances  is 
total  product,  and  to  the  extent  that  any  share  has 
its  minimum  limit,  the  maximum  that  can  normally 
go  to  any  other  share  is  limited  thereby. 

To  the  extent  that  competition  exists  among  the 
owners  of  any  factor,  their  share  will  tend  towards 
its  minimum  limit ;  while  to  the  extent  that  they 
can  avail  themselves  of  monopolization,  their  share 
will  tend  towards  its  maximum.  As  the  prices  of 
general  commodities  may  sometimes  be  forced  below 
cost  of  production,  so,  in  the  case  of  distribution, 
excessive  competition  or  monopolization  may  at 
times  drive  some  share  below  what  would  suffice  to 
renew  the  efficiency  of  the  factor  involved.  Such 
an  excess  of  competition  or  monopolization,  how- 
ever, tends  to  provide  its  own  remedy  through  its 
effect  in  impairing  production.  But  the  mere  possi- 
bility that  a  share  can  fall  below  the  normal  mini- 
mum, even  temporarily,  is  a  matter  of  serious 
concern  to  society,  foi  its  consequences  may  not  be 
temporary. 

99.  From  the  nature  of  the  conditions  deter- 
mining the  shares  in  distribution,  it  follows  that 
the  immediate  effect  of  an  increase  in  the  share  ac- 
cruing to  the  owner  of  any  factor  is  a  decrease  in 


218  THEORY  OF  ECONOMICS 

some  one  or  more  of  the  other  shares,  and  that  a  de- 
crease in  any  share  has  for  its  immediate  effect  the 
increase  in  one  or  more  of  the  other  shares.  But 
the  amount  that  is  received  by  the  owner  of  any 
factor  is  an  important  element  in  determining  the 
efficiency  of  production.  Hence,  if  the  result  of  an 
increase  in  any  share  is  such  an  increase  in  pro- 
ductive efficiency  as  to  lead  to  a  corresponding  in- 
crease in  output,  provided  such  increase  in  output 
accrues  to  the  owners  of  the  other  shares,  the  ulti- 
mate result  will  be  an  increase  in  one  share  without 
detriment  to  the  others.  Indeed,  since  conditions 
may  exist  in  which  the  increased  incentive  resulting 
from  an  increase  in  a  share,  will  enlarge  the  fund 
for  subsequent  distribution  beyond  the  amount  of 
such  increase  in  the  share,  it  is  possible  that  all  the 
participants  in  distribution  may  ultimately  profit  by 
adding  to  one  of  the  shares.  In  a  similar  manner, 
the  decrease  in  any  .share  may  be  more  than  offset 
ultimately  by  an  increase  in  production.  A  decrease 
in  any  share  will  result  in  at  least  a  temporary  in- 
crease in  one  or  more  of  the  other  shares,  but  the 
increased  incentive  of  those  profiting  thereby  may, 
under  some  circumstances,  lead  to  an  increase  in 
the  total  output.  The  mere  fact,  however,  that  an 
increase  in  production  follows  an  increase  in  a  share, 
does  not  signify  that  an  increase  in  one  share 
has  taken  place  without  loss  to  any  other  share. 
Such  a  result  follows  only  ivhen  in  subsequent  dis- 
tribution ,  the  increased  output  accrues  to  the  advan- 
tage of  him  whose  share  was  previously  decreased. 


THE  SHARES  IN  DISTRIBUTION        219 

To  this  extent,  and  to  this  extent  only,  are  the 
interests  of  the  owners  of  the  different  factors  of 
production  identical  rather  than  antagonistic.  In 
so  far  as  there  is  a  possibility  that  each  may  profit 
thereby,  it  is  to  the  interest  of  all  that  as  large  a 
fund  as  possible  should  be  produced.  Beyond  this, 
in  the  process  of  distribution,  there  is  rivalry,  and 
the  distribution  of  product  among  the  owners  of  the 
factors  depends  upon  their  relative  powers  of  con- 
trol, subject  only  to  the  limitation  that  excessive 
use  of  the  power  of  control  by  impairing  the  proc- 
ess of  production,  may  defeat  its  own  end. 

100.  Competition  among  the  owners  of  any  of  the 
factors,  increases  the  power  of  control,  i.  e.,  the 
monopolization  of  one  or  more  of  the  other  groups 
of  owners ;  and  monopolization  by  the  owners  of 
any  of  the  factors,  increases  the  competition  among 
one  or  more  of  the  other  groups  of  owners.  Thus 
competition  among  laborers  for  employment,  in- 
creases the  power  of  employers  to  control  the  terms 
of  exchange,  and  such  power  of  control  is  as  truly 
monopolistic  as  any  other.  The  difference  between 
the  power  of  control  by  employers  which  results 
from  a  formal  agreement  between  them  and  that 
which  results  from  the  competition  of  laborers,  does 
not  lie  in  the  fact  that  the  former  is  monopolistic 
and  the  latter  not,  unless  the  same  economic  phe- 
nomenon is  called  by  different  names  under  different 
conditions.  The  difference  in  such  a  case  is  purely 
one  of  method  of  obtaining  power  of  control,  and 
power  of  control  which  affects  rival  interests  is 


220  THEORY  OF  ECONOMICS 

monopolistic  however  it  may  arise.  On  the  other 
hand,  combinations  among  laborers  which  give  to 
them  increased  power  of  control  over  the  sale  of 
their  services,  is  monopolization,  and  increases  the 
competition  among  employers. 

In  like  manner,  competition  among  employers 
increases  the  laborers'  power  of  control,  i.  e. ,  their 
monopolization  of  their  services,  while  combination 
among  employers  or  any  other  method  by  which 
their  power  of  control  is  increased,  increases  the 
competition  among  laborers.  The  same  is  true  of 
competition  among  the  owners  of  any  of  the  fac- 
tors and  of  monopolization  by  any  of  them,  in  rela- 
tion to  the  owners  of  the  other  factors. 

101.  The  introduction  of  a  medium  of  exchange 
or  of  a  standard  unit  or  measure  of  value  in  no  way 
alters  the  fundamental  principles  according  to  which 
the  shares  are  determined.  When  a  medium  of 
exchange  is  employed,  the  amount  of  product  finally 
accruing  to  the  owners  of  the  factors  of  production 
depends  upon  the  amount  of  the  medium  received 
and  its  power  to  purchase  commodities.  Here,  two 
exchanges  are  necessary  where  otherwise  one  would 
suffice,  and  "each  of  these  exchanges  is  subject  to 
the  principles  that  govern  in  buying  and  selling. 
It  is  often  desirable  to  distinguish  between  that 
which  the  owner  of  a  factor  receives  in  a  medium 
of  exchange  and  that  which  ultimately  comes  to 
him,  so  the  shares  are  sometimes  called  "nominal" 
when  reference  is  made  to  the  amount  received  in 
the  medium  of  exchange,  and  "real"  when  the 


THE  SHARES  IN  DISTRIBUTION        221 

amount  of  the  medium  received  and  its  purchasing 
power  are  meant.  The  use  of  a  standard  measure 
of  value  in  connection  with  the  sale  of  the  services 
of  the  factors,  as  in  the  case  of  exchange  in  general, 
involves  the  determination  of  price  by  comparing 
the  value  of  the  services  and  of  that  which  is  re- 
ceived in  payment  therefor,  with  the  value  of  a 
third  commodity,  instead  of  with  each  other  di- 
rectly, as  would  be  done  in  the  absence  of  a  standard 
measure. 

While,  however,  the  employment  of  these  aids  to 
exchange  does  not  alter  the  fundamental  principles 
involved,  they  are  not  without  special  influence 
upon  distribution.  The  purchasing  power  of  the 
medium  of  exchange  and  the  value  of  the  standard 
measure  are  subject  to  variations.  A  fall  in  the 
power  of  the  medium  of  exchange  to  purchase  gen- 
eral commodities  will  decrease  the  shares  unless 
there  is  a  corresponding  rise  in  the  price  of  the 
services  of  the  factors,  and  the  opposite  effect  will 
follow  a  rise  in  the  general  purchasing  power  of 
the  medium  of  exchange,  when  unaccompanied  by 
a  fall  in  the  price  of  the  services  of  the  factors.  A 
similar  effect  follows  from  changes  in  the  value  of 
the  standard  measure.  If,  when  a  change  occurs 
in  the  value  of  the  standard  measure,  the  prices  of 
the  services  of  the  factors  vary  exactly  as  do  the 
prices  of  general  commodities,  such  change  in  the 
value  of  the  standard  measure,  though  affecting  the 
nominal  shares,  will  not  alter  the  real  shares.  But 
the  prices  of  the  services  of  the  factors  do  not  nee- 


222  THEORY  OF  ECONOMICS 

essarily  nor  presumably  change  coincident  and  coex- 
tensive with  changes  in  the  prices  of  commodities. 
It  is  doubtless  true  that  when  changes  occur  in 
the  prices  of  general  commodities,  there  tends  to 
follow  a  readjustment  of  the  prices  of  the  services 
of  the  factors,  but  such  readjustment  is  accom- 
plished, if  at  all,  through  the  working  of  competi- 
tion and  monopolization,  as  in  the  ordinary  deter- 
mination of  prices.  Hence  the  introduction  of  a 
medium  of  exchange  and  of  a  standard  measure  of 
value,  subject  as  they  are  to  fluctuations,  intensifies 
the  advantages  or  disadvantages  inherent  in  the 
several  factors  in  their  relation  to  monopolization 
and  competition.  And  while,  even  under  these 
conditions,  there  can  be  no  doubt  that  the  advan- 
tages to  society  from  the  use  of  a  medium  of 
exchange  and  of  a  standard  of  value,  vastly  exceed 
any  incidental  disadvantages,  still  the  possible 
effect  of  fluctuations  in  the  value  of  these  upon  the 
shares,  emphasizes  the  desirability  of  securing  as 
stable  standards  and  media  of  exchange  as  possible. 
The  analysis  of  the  division  of  product  into 
rent,  interest,  profits  and  wages,  gives  the  following 
principles  of  distribution  :— 

(1)  The  shares  are  the  returns  for  the  services 
of  the  several  factors  of  production  and  are  subject 
to  the  general  law  of  value. 

(2)  The  value  of  the  services  of  any  factor  de- 
pends upon  the  relation  of  the  supply  thereof  to  the 
demand  therefor,  varying  as  demand  and  inversely 
as  supply  varies. 


THE  SHARES  IN  DISTRIBUTION        223 

(3)  The  amount  of  any  share  at  any  time  is  the 
resultant  of  the  influence  of  competition  and  mon- 
opolization upon  the  sale   of   the  services  of   the 
corresponding  factor. 

(4)  The  normal  minimum  limit  to  each  share  is 
the  amount  necessary  to  bring  the  corresponding 
factor  into  activity ;   the  normal  maximum  limit  is 
the   total  product  less  the  sum  of  the   minimum 
shares  of  the  other  factors. 


RENT 

102.  Rent  is  the  return  to  the  owner  of  situation 
for  the  services  thereof.  The  principles  of  distribu- 
tion as  applied  to  rent  may  be  thus  stated: — Rent 
depends  primarily  upon  the  value  of  the  services  of 
situation;  the  value  of  the  services  of  situation  de- 
pends upon  the  relation  of  the  supply  thereof  to  the 
demand  therefor.  The  amount  of  rent  received  by 
the  owner  of  situation  from  the  sale  of  the  services 
thereof  is  determined  by  the  competitive  and  monop- 
olistic conditions  prevailing.  The  normal  downward 
limit  to  rent  is  the  smallest  amount  that  will  suffice 

Ricardo,  Principles  of  Political  Economy  and  Taxation, 
edited  by  E.  C.  K.  Gonner,  chapter  ii.;  Walker,  Political 
Economy,  Pt.  IV.,  chapter  ii.;  Laughlin,  Elements  of  Polit- 
ical Economy,  chapter  xxii.;  Gide,  Political  Economy,  trans., 
Bk.  IV.,  Pt.  I.,  chapter  iii.,  (vi.);  Pt-  H.,  chapter  iv.,  (ii., 
iii.);  Ely,  Outlines  of  Economics,  Bk.  II.,  Pt.  III.,  chapters 
L,  ii.;  Clark,  The  Distribution  of  Wealth,  (see  index); 
Jevons,  Theory  of  Political  Economy,  chapter  vi.;  Mill, 
Principles  of  Political  Economy,  Bk.  II.,  chapter  xvi. ;  Mar- 
shall, Principles  of  Economics,  Bk.  VI.,  chapters  ix.,  x.; 
Sidgwick,  Principles  of  Political  Economy ,  Bk.  II.,  chapter 
vii. ;  Pantaleoni,  Pure  Economics,  trans.,  Pt.  III.,  chapter 
iv.;  VonWieser,  Natural  Value,  trans.,  Bk.  III.,  Pt.  II.; 
Roscher,  Political  Economy,  trans.,  Bk.  III.,  chapter  ii. 

224 


RENT  225 

to  induce  the  owner  of  situation  to  permit  its  use. 
For,  if  through  the  influence  of  competition  among 
the  owners  of  situation,  rent  falls  below  this  point, 
situation  becomes  idle,  and  the  decrease  in  the  avail- 
able supply  of  situation  tends  to  check  the  fall  in 
rent.  The  normal  upward  limit  to  rent  is  the  dif- 
ference between  the  total  product  and  the  minimum 
shares  of  interest,  profits  and  wages.  For,  if 
through  monopolization  by  the  owners  of  situation, 
rent  increases  so  as  to  encroach  upon  the  mini- 
mum limits  of  some  of  the  other  shares,  there  will 
follow  a  decrease  in  the  available  supply  of  the  cor- 
responding factors.  This  will  lead  either  to  an 
increase  in  the  shares  that  have  fallen  below  the 
minimum  or  to  an  impairment  of  the  efficiency  of 
production,  a  condition  that  in  itself  will  tend  to 
diminish  rent  by  decreasing  the  amount  of  wealth 
available  for  distribution. 

103.  Situation  as  a  factor  of  production,  usually 
exists  in  conjunction  with  capital  in  some  form, 
generally  soil.  Hence  rent  is  commonly  considered 
by  economists,  to  be  a  return  for  the  services  of 
land,  though  this  concept  is  often  qualified  by 
adding  to  land  other  natural  agents,  and  limiting 
all  to  their  unimproved  state.  But  so  far  as  the 
nature  of  the  services  rendered  to  production  is 
concerned,  there  is  no  difference  between  the  func- 
tions performed  by  unimproved  and  those  performed 
by  improved  land.  Indeed,  in  so  far  as  the  function 
of  material  may  be  said  to  consist  in  embodying 
want- attracting  power,  there  is  no  essential  differ- 


226  THEORY  OF  ECONOMICS 

ence  between  the  function  performed  by  soil  and 
that  performed  by  other  material  commonly  recog- 
nized as  capital.  The  return,  then,  for  the  use  of 
soil  should  not  be  considered  as  constituting  a 
different  share  from  the  return  for  the  use  of  such 
commodities  as  cattle,  iron,  lumber  and  cotton. 

Nor  can  the  definition  of  rent  as  return  for  the 
use  of  unimproved  land  and  other  natural  agents  be 
justified  on  the  ground  that  this  corresponds  with 
the  popular  use  of  the  term.  For  in  popular  usage, 
so  far  as  the  nature  of  rent  is  concerned,  no 
distinction  is  made  between  improved  and  unim- 
proved land;  nor,  indeed,  is  rent  in  business  inter- 
course limited  to  the  return  for  the  use  of  land.  In 
common  phrase,  the  term  rent  is  employed  with 
varying  consistency  in  transactions  which  involve 
the  loan  of  any  commodity  as  distinguished  from 
the  sale  thereof.  Thus  in  popular  language,  one 
pays  rent  for  a  factory,  a  farm,  a  machine,  or  any- 
thing else,  when  he  obtains  the  right  to  use  it  with- 
out acquiring  the  legal  title  to  the  ownership  of  it. 
In  case  of  such  a  loan,  it  is  expected  that  the  com- 
modity itself  will  be  returned  to  the  owner.  Com- 
mercial rent  is  thus  to  be  distinguished  from 
economic  rent,  whether  the  latter  is  considered  as  a 
return  for  the  use  of  unimproved  land  and  other 
natural  agents,  as  in  many  economic  treatises,  or  as 
a  return  for  the  use  of  situation  only,  the  view  here 
accepted. 

Moreover,  since  situation  usually  appears  in  con- 
junction with  some  other  factor  of  production, 


RENT  227 

economic  rent,  considered  as  a  return  for  situation 
only,  rarely,  if  ever,  appears  in  actual  experience 
as  an  entirely  distinct  share.  A  share  in  distribu- 
tion would  be  pure  economic  rent  only  when  the 
services  of  the  other  factor  or  factors  associated 
with  the  situation,  had  no  value.  Thus  when  a 
share  is  received  in  return  for  the  services  of  sit- 
uation and  capital,  as  in  the  case  of  a  payment  for 
the  use  of  a  farm,  it  is  a  combination  of  economic 
rent  and  economic  interest,  unless  the  services  of 
the  capital  involved  are  without  value. 

The  essential  difference  between  rent  and  the 
other  shares  is  sometimes  held  to  arise  from  the 
peculiar  nature  of  the  law  governing  rent.  Ac- 
cording to  this  view,  the  distinguishing  character- 
istic of  rent  is  the  fact  that  it  is  due  to  and  deter- 
mined by  the  difference  in  productive  efficiency  of 
different  portions  of  the  factor  for  whose  services  it 
is  a  remuneration.  This  leads  to  the  inference  that 
such  differences  in  the  case  of  the  other  factors 
do  not  affect  the  return  for  their  services.  But 
differences  in  productive  efficiency  in  capital,  en- 
terprise and  labor,  cause  very  marked  differences  in 
the  returns  for  the  use  of  different  portions  of  each 
of  these ;  nor  can  any  valid  reason  be  given  why 
such  differences  should  be  considered  as  of  prime 
importance  in  connection  with  rent  and  of  inci- 
dental or  no  importance  in  connection  with  the 
other  shares. 

The  failure  to  recognize  the  fact  that  differences 
in  productive  efficiency  affect  the  returns  in  the  case 


228  THEORY  OF  ECONOMICS 

of  each  of  the  factors  is  largely  due  to  the  method 
of  estimating  those  returns.  Rent  is  computed  on 
the  basis  of  a  unit  of  area;  interest,  on  the  basis  of  a 
unit  of  the  value  of  capital;  profits,  usually,  on  the 
basis  of  a  unit  of  the  value  of  product,  though 
sometimes  on  the  basis  of  a  unit  of  the  value 
of  that  which  is  invested  in  an  undertaking; 
and  wages,  on  the  basis  of  a  per  capita  unit. 
These  methods  of  computing  the  several  shares 
suffice  in  making  comparison  between  returns 
for  different  portions  of  the  same  factor,  but  a 
comparison  of  the  principle  determining  a  per  acre 
return  for  situation  (or  land)  with  that  deter- 
mining a  per  cent,  of  value  of  capital  return 
for  capital,  and  a  per  cent,  of  value  of  product 
return  for  enterprise,  and  a  per  capita  return 
for  labor,  involves  a  disregard  of  logical  con- 
sistency. The  effect  of  this  in  obscuring  the  influ- 
ence of  differences  in  the  productive  efficiency  of 
different  portions  of  the  factors  appears  with  special 
clearness  in  the  case  of  interest.  Differences  of 
quality  in  capital  manifest  themselves  in  differences 
in  the  value  of  capital.  Where,  then,  the  owners  of 
capital  receive  the  same  rate  per  cent,  of  value,  it 
is  inferred  that  differences  in  quality  are  without 
influence  upon  the  returns.  But  it  is  evident  that 
if  each  of  two  persons  loans  a  machine  of  the  same 
character  except  that  one  of  them  is  antiquated, 
while  the  other  possesses  the  latest  and  most  efi&- 
cient  improvements,  differences  of  quality  will  have 
as  great  an  influence  on  the  returns  as  in  the  case 
of  situation  (or  land.) 


RENT  229 

104.  Such  differences  as  exist  between  the  condi- 
tions determining  rent  and  those  determining  the 
other  shares, — and  the  extent  of  such  differences 
has  been  greatly  overestimated, — arise  from  differ- 
ences in  the  potency  of  competition  and  monopoli- 
zation in  their  relation  to  the  several  factors  of 
production.  Situation  is  immovable,  hence  its 
relation  to  production  can  vary  only  with  move- 
ments in  population  or  changes  in  transportation 
facilities.  This  fact  tends  to  give  very  definite 
limits  to  the  operation  of  competition  and  monop- 
olization in  the  sale  of  the  services  of  situation. 
Since  the  supply  of  situation  available  for  any 
given  demand  is  fixed  by  nature,  the  number  of 
available  alternatives  in  any  given  case  is  definitely 
limited;  and  since  no  portion  of  supply  can,  phys- 
ically speaking,  be  substituted  for  another,  the 
ownership  of  any  specific  portion  of  supply  is  in  a 
high  degree  monopolistic.  Accordingly,  as  popu- 
lation increases  and  with  it  demand  for  situation, 
the  price  of  the  services  of  situation  will  tend  to 
increase. 

Owing  to  the  limits  placed  by  nature  upon 
the  supply  of  situation,  it  follows  that  whatever 
differences  there  may  be  in  the  productive  efficiency 
of  two  areas  in  use  for  the  same  market,  will  tend 
to  redound  to  the  advantage  of  the  owner  of  situa- 
tion. Thus  the  owner  of  a  lot  in  the  center  of  New 
York  City  can  secure  from  the  sale  of  its  services 
nearly  ('or  quite)  all  the  advantage  that  it  has  over 
a  lot  in  the  suburbs,  for  since  the  supply  of  area  in 


230  THEORY  OF  ECONOMICS 

that  particular  place  is  absolutely  limited,  a  very 
slight  advantage  allowed  to  the  would-be  purchaser 
of  the  services  of  situation  will  lead  him  to  prefer 
that  which  is  more  favorably  located.  Nor  is 
the  principle  here  involved  peculiar  to  situation  and 
rent.  It  is  equally  true  of  every  factor,  that  dif- 
ferences in  productive  efficiency  redound  to  the 
advantage  of  the  owner  thereof,  provided  the  differ- 
ence is  sufficiently  great  to  affect  the  demand  for 
the  services  of  the  factor.  For  where  demand  suf- 
fices to  bring  into  activity  different  grades  of  any 
factor,  he  who  owns  the  better  grades,  possesses  a 
power  of  control  over  the  terms  of  exchange  which 
enables  him  to  secure  most  or  all  of  the  advantage 
arising  from  the  superior  efficiency  of  his  factor. 
To  that  extent  at  least  monopolization  prevails  over 
competition  in  determining  the  price  of  the  services 
of  his  factor. 

Though  monopolization  enables  the  owner  of 
any  situation  to  profit  by  its  superior  location 
for  production,  it  is  not  to  be  inferred  that 
competition  is  without  influence  in  determin- 
ing rent.  Other  situations  appear  in  competi- 
tion and  tend  to  prevent  the  owner  of  any 
portion  of  this  factor  from  securing  for  the  use  of 
its  services  an  amount  which  exceeds  that  paid  for 
other  portions,  by  more  than  its  superior  effi- 
ciency. Thus  if  by  reason  of  its  nearness  to  market, 
the  value  of  wheat  produced  on  a  given  area  exceeds 
that  produced  on  a  more  distant  area  by  $100,  the 
owner  of  the  more  favorable  location  can  secure 


RENT  231 

nearly  or  quite  that  much  more  rent  than  can  the 
owner  of  the  less  favorable  location.  But  should 
the  rent  demanded  by  the  owner  of  the  first  area 
exceed  that  asked  for  the  use  of  the  other  by  more 
than  $100,  the  second  would  become  the  preferable 
alternative  and  competition  would  force  the  rent  of 
the  first  to  fall.  Furthermore,  should  the  influence 
of  monopolization  ever  enable  the  owner  of  situa- 
tion to  exact  so  large  a  share  of  product  as  to  leave 
for  the  owners  of  the  other  factors,  less  than  suf- 
fices to  induce  them  to  make  their  factors  available 
for  use,  there  would  follow  a  decrease  in  the  supply 
of  those  factors,  with  the  result  that  the  control 
of  the  owners  of  the  remaining  supply  would  in- 
crease, and  with  that  would  come  the  power  on 
their  part  to  secure  a  larger  share  in  distribution. 

105.  So  far  as  the  return  for  situation  alone  is 
concerned,  the  minimum  limit,  i.  <?.,  the  lowest  re- 
turn that  will  suffice  to  induce  the  owner  of  a  given 
situation  to  allow  its  use,  may  be  very  small.  In- 
deed, in  some  instances,  the  owner  of  situation  may 
allow  it  to  be  used  without  any  return  other  than 
that  which  will  maintain  the  efficiency  of  the  land 
or  other  material  associated  with  situation,  for  by 
so  doing  a  demand  may  be  developed  that  will  later 
redound  to  his  advantage.  Thus  the  owner  of 
situation  in  a  sparsely  settled  section  where  the 
supply  of  situation  relative  to  the  demand  therefor 
is  very  great,  may  consider  it  to  his  advantage  to 
allow  its  use  without  recompense,  hoping  thereby 
to  induce  a  movement  of  population  thither  and 


232  THEORY  OF  ECONOMICS 

ultimately  to  gain  by  the  increased  demand.  In 
such  cases  there  exists  situation  that  brings  no  rent 
to  its  owner,  though,  strictly  speaking,  the  owner 
invests  present  advantage  for  future  gain.  The 
returns  which  he  would  otherwise  require  for 
the  use  of  his  property,  he  invests  in  inducing 
others  to  come,  in  order  that  he  may  subse- 
quently profit  thereby,  just  as  a  merchant  oc- 
casionally sells  goods  at  or  below  cost  in  the 
hope  of  building  up  a  more  extensive  trade. 

No-rent  situation  will  be  found,  if  anywhere, 
on  the  margin  of  cultivation,  z*.  <?.,  where  the 
output  of  the  productive  process  is  so  small 
that  one  can  better  afford  to  seek  another  field  for 
his  activity  than  pay  for  the  use  of  situation  there, 
as  the  amount  remaining  to  him  after  such  pay- 
ment would  be  less  than  he  could  secure  elsewhere. 
Indeed,  in  actual  experience  the  conditions  on  the 
margin  of  cultivation  are  often  such  that  he  who 
undertakes  cultivation  there,  must  have  the  entire 
product  in  order  to  live  and  continue  operations. 
But  the  existence  of  a  no-rent  situation  on  the 
margin  of  cultivation  is  not  necessarily  permanent. 
Should  population  increase  to  such  an  extent  that 
all  cultivable  area  becomes  occupied  and  should  the 
demand  for  commodities  raise  their  price  above  the 
expense  of  production,  no-rent  situation  might  en- 
tirely disappear.  No-rent  situation  is  an  incident 
to  rent,  not  an  essential  feature  thereof. 

106.  The  fact  that  under  some  circumstances, 
situation  may  bring  no  return  for  its  services  and 


RENT  233 

that  the  owner  of  situation  can  obtain  most  or  all 
of  the  difference  in  product  that  is  due  to  the 
superior  efficiency  of  his  situation  as  compared 
with  other  situation  which  serves  the  same  market, 
form  the  basis  of  the  Ricardian  doctrine  of  rent. 

Rent  as  defined  by  Ricardo  is  "that  portion  of  the 
produce  of  the  earth,  which  is  paid  to  the  landlord 
for  the  use  of  the  original  and  indestructible  powers 
of  the  soil."1 

The  conditions  that  give  rise  to  and  determine 
rent  are  thus  described  :  "On  the  first  settling  of  a 
country,  in  which  there  is  an  abundance  of  rich  and 
fertile  land,  a  very  small  portion  of  which  is  re- 
quired to  be  cultivated  for  the  support  of  the  actual 
population,  or  indeed  can  be  cultivated  with  the 
capital  that  the  population  can  command,  there  will 
be  no  rent ;  for  no  one  would  pay  for  the  use  of 
land,  when  there  was  an  abundant  quantity  not  yet 
appropriated,  and,  therefore,  at  the  disposal  of 
whosoever  might  choose  to  cultivate  it."  This  de- 
scription of  the  "ante-rent  stage  of  cultivation" 
has  been  modified  by  subsequent  exponents  of  the 
theory,  who  say  :  "If  the  track  be  held  by  a  num- 
ber of  competing  owners,  each  acting  for  himself, 
seeking  his  individual  interest,  no  rent  will  be  paid, 
or  only  a  rent  so  small  that  for  purposes  of  economic 
reasoning  (sic)  we  may  disregard  it."  2 

"If,"  Ricardo  continues,  "all  land  had  the  same 

1  David  Ricardo,   Principles  of  Political   Economy  and 
Taxation,  ed.  by  K.  C.  K.  Gonner,  p.  48,  et  seq. 

2  Walker,  Political  Economy,  p.  194. 


234  THEORY  OF  ECONOMICS 

properties,  if  it  were  unlimited  in  quantity  and 
uniform  in  quality,  no  charge  could  be  made  for  its 
use,  unless  where  it  possessed  peculiar  advantages 
of  situation.  It  is  only,  then,  because  land  is  not 
unlimited  in  quantity  and  uniform  in  quality,  and 
because  in  the  progress  of  population,  land  of  an 
inferior  quality  or  less  advantageously  situated,  is 
called  into  cultivation,  that  rent  is  ever  paid  for 
the  use  of  it.  When  in  the  progress  of  society, 
land  of  the  second  degree  of  fertility  is  taken  into 
cultivation  rent  immediately  commences  on  that  of 
the  first  quality,  and  the  amount  of  that  rent  will 
depend  on  the  difference  in  the  quality  between 
these  two  portions  of  land." 

"When  land  of  the  third  quality  is  taken  into 
cultivation,  rent  immediately  commences  on  the 
second,  and  it  is  regulated  as  before,  "by  the  differ- 
ence in  the  productive  powers.  At  the  same  time, 
the  rent  of  the  first  quality  will  rise,  for  that  must 
always  be  above  the  rent  of  the  second,  by  the  dif- 
ference between  the  produce  which  they  yield  with 
a  given  quantity  of  capital  and  labor.  With  every 
step  in  the  progress  of  population,  which  shall 
oblige  a  country  to  have  recourse  to  land  of  a  worse 
quality,  to  enable  it  to  raise  its  supply  of  food,  rent 
on  all  the  more  fertile  land  will  rise."  To  this 
exposition  of  the  doctrine  of  rent,  has  been  added 
the  following  important  qualification  :  ' '  All  scien- 
tific reasoning  about  rent  is  based  on  the  assump- 
tion that  the  tenant  will  leave  the  soil  in  as  good 
condition  as  it  was  when  he  took  it."  J 

1  Walker,  Political  Economy,  p.  195. 


RENT  235 

From  this  view  of  what  rent  is  and  of  the  condi- 
tions that  give  rise  to  it,  the  following  law  has  been 
derived  : 

"1.  Rent  arises  out  of  differences  existing  in  the 
productiveness  of  different  soil  under  cultivation  at 
the  same  time,  for  supplying  the  same  market. 

"2.  The  amount  of  rent  is  determined  by  the 
degree  of  those  differences.  Specifically,  the  rent 
of  any  piece  of  laud  is  determined  by  the  difference 
between  its  annual  yield  and  that  of  the  least  pro- 
ductive land  actually  cultivated  for  the  supply  of 
the  market,  under  equal  applications  of  labor  and 
capital,  it  being  assumed  that  the  quality  of  the 
land  as  a  productive  agent,  is,  in  neither  case,  im- 
paired or  improved  by  such  cultivation."1 

107.  The  place  occupied  by  this  doctrine  of  rent 
in  economic  theory  is  unique.  Generally  accepted 
without  question,  it  forms  the  starting-point  of 
most  theories  of  distribution,  and  from  it  are  drawn 
conclusions  of  the  highest  importance.  It  was  long 
held  that  the  principles  governing  rent  are  peculiar 
to  it  and  inapplicable  to  the  other  shares.  This 
view  still  prevails  so  far  as  interest  and  wages  are 
concerned,  but  some  hold  that  the  principles  gov- 
erning profits  are  the  same  as  those  governing  rent. 
Under  these  circumstances  the  Ricardian  doctrine 
of  rent  merits  further  examination. 

This  doctrine  rests  upon  four  hypotheses:  (1) 
that  the  supply  of  cultivable  land  of  some  sort  is  un- 
limited ;  (2)  that  the  product  which  goes  to  renew 
the  fertility  of  the  soil  is  not  rent  ;  (3)  that  differ- 

1  Walker,  Political  Economy,  p.  197. 


236  THEORY  OF  ECONOMICS 

ences  exist  in  the  productive  efficiency  of  land  ;  and 
(4)  that  competition  is  free  to  the  extent  that  mem- 
bers of  society  know  of  the  existence,  location  and 
character  of  land,  and  are  able  to  act  upon  that 
knowledge.1  From  these  hypotheses  there  follow 
two  conclusions  :  (1)  there  exists  under  cultiva- 
tion a  body  of  no-rent  land,  and  (2)  the  difference 
between  the  product  on  no-rent  land  and  the  prod- 
uct on  other  land  under  cultivation,  assuming 
equal  applications  of  labor  and  capital,  constitutes 
rent.  The  share  can  be  no  more  and  no  less. 

Conceding  the  Iwpotheses  upon  which  the  Ricar- 
dian  doctrine  is  based,  the  validity  of  the  conclu- 
sions drawn  is  beyond  question.  But  the  significance 
of  those  conclusions,  in  so  far  as  they  are  thought 
to  throw  light  upon  the  nature  and  law  of  rent  as 
compared  with  the  other  shares,  disappears  upon 
further  analysis;  for  an  assumption  of  the  same 
hypotheses  will  give  exactly  the  same  law  in  the 
case  of  every  share.  Take  wages  for  example.  If 
it  be  assumed  that  the  supply  of  labor  is  unlimited, 
and  if  from  wages  be  excluded  the  amount  neces- 
sary to  renew  the  efficiency  of  labor,  and  if,  fur- 
ther, differences  in  the  efficiency  of  laborers  be  con- 
ceded and  it  be  assumed  that  competition  is  free, 

1  The  Ricardian  doctrine  of  rent  differs  from  that  enter- 
tained in  the  present  discussion  in  its  concept  of  the  nature 
of  the  factor  for  whose  services  rent  is  a  return,  but  in  con- 
sidering the  validity  of  the  reasoning  employed  in  support 
of  that  doctrine,  its  concept  of  rent  as  a  return  for  the  use  of 
land  may  be  accepted. 


RENT  237 

there  will  exist  a  class  of  no- wage  laborers,  i.  e.,  of 
laborers  whose  income  no  more  than  suffices  to 
maintain  them.  Wages,  then,  under  these  assump- 
tions, being  the  return  for  the  use  of  labor  over  and 
above  the  amount  required  to  maintain  its  efficiency, 
will  equal  the  difference  between  the  productive 
efficiency  of  no-wage  labor  and  of  labor  above  that 
grade,  equal  applications  of  capital  and  land  being 
assumed. 

Unreasonable  as  these  conclusions  may  seem  in 
connection  with  wages,  they  are  equally  as  valid 
as  those  that  constitute  the  Ricardian  doctrine  of 
rent.  Moreover,  from  a  scientific  standpoint,  in 
seeking  to  discover  the  laws  according  to  which 
product  is  divided  into  shares,  it  is  impossible  to 
justify  the  use  of  hypotheses  for  the  determination 
of  one  share  that  are  not  applicable  equally  to  the 
others.  The  assumption  of  similar  hypotheses  will 
give  a  no-interest  class  of  capital  and  a  no-profit 
class  of  enterprise,  for  if  the  supply  of  these  factors 
is  unlimited,  no  one  will  pay  more  for  the  use  of 
any  portion  of  them  than  suffices  to  maintain  its 
efficiency,  unless  it  is  of  exceptional  productive 
capacity. 

When  the  Ricardian  doctrine  of  rent  is  exam- 
ined closely,  it  becomes  evident  that  all  that  it 
seems  to  demonstrate  is  assumed  in  its  hypotheses. 
If  the  assumption  that  the  supply  of  land  is  un- 
limited, which  is  contrary  to  fact,  is  eliminated, 
and  rent  is  interpreted,  as  defined  in  the  Ricardian 
theory,  to  include  all  of  product  that  goes  to  the 


238  THEORY  OF  ECONOMICS 

owner  of  land,  whether  as  a  direct  payment  or  in- 
directly through  its  application  to  renew  productive 
efficiency,  there  remains  of  the  Ricardian  doctrine 
of  rent,  the  fact,  not  that  rent  arises  out  of  dif- 
ferences in  the  productivity  of  land  and  equals 
the  difference  in  product  resulting  therefrom,  but 
that  where  land  of  different  quality  is  utilized  for 
supplying  the  same  market,  assuming  that  the 
efficiency  of  the  other  factors  employed  remains  the 
same,  nearly  or  quite  all  the  difference  in  product 
arising  from  differences  in  the  efficiency  of  land, 
will  go  to  the  owner  of  land,  because  under  the  ex- 
isting conditions  the  owners  can  avail  themselves  of 
monopolization  to  that  extent.  This,  however,  as 
has  been  seen,  is  true  of  the  returns  for  the  use  of 
any  one  of  the  factors. 

108.  One  of  the  most  important  deductions  from 
the  Ricardian  doctrine  of  rent  is  that  '  'rent  is  not 
a  component  part  of  the  price  of  commodities."1 
By  this  is  meant,  not  that  where  rent  exists  it  does 
not  come  out  of  the  price  paid  for  the  commodi- 
ties, but  that  price  does  not  depend  in  any  way 
upon  rent ;  that,  on  the  contrary,  rent  depends 
upon  price,  so  that  high  rent  is  not  the  cause  of 
high  prices,  but  is  itself  the  result  of  high  prices. 
In  support  of  this,  it  is  said  that  there  will  not  nor- 
mally be  two  'prices  for  commodities  in  the  same 
market,  and  that  the  price  of  any  commodity  must 
be  high  enough  to  pay  for  its  production  under  the 
most  unfavorable  conditions  which  it  may  be  found 

1  Ricardo,  Ibid.,  p.  55. 


RENT  239 

necessary  to  utilize  to  meet  existing  demand.  If, 
now,  the  product  re'quired  to  maintain  the  efficiency 
of  land  is  excluded  from  rent,  and  it  is  assumed 
that  competition  prevails  to  the  extent  of  reducing 
price  to  cost  of  production  and  that  the  supply  of 
land  is  unlimited,  so  that  when  the  demand  for  a 
commodity  raises  its  price,  new  land  is  brought 
into  cultivation,  the  product  from  which  suffices 
only  to  pay  current  wages,  interest  and  profits,  and 
to  maintain  the  efficiency  of  land,  the  conclusions 
follow :  (1)  that  no  rent  comes  out  of  the  price  of 
those  commodities  that  are  produced  on  new  land, 
for  by  hypothesis  no  rent  exists  there,  and  (2)  that 
the  reason  why  rent  comes  to  be  paid  for  any  land 
is  that  the  prices  of  commodities  increase. 

The  validity  of  these  conclusions,  it  will  be  ob- 
served, rests  upon  the  same  hypotheses  as  does  the 
Ricardian  doctrine  of  rent.  The  price  of  a  com- 
modity must  undoubtedly  be  sufficient  to  pay  for  its 
production  under  the  most  disadvantageous  condi- 
tions necessary  to  be  utilized  for  the  supply  of  exist- 
ing demand.  But  since  the  supply  of  land  is  limited, 
it  may  be  that  the  cost  under  those  conditions  will 
include  rent,  even  when  the  product  that  is  used  to 
restore  the  efficiency  of  land  is  excluded  from  that 
category.  When,  however,  this  product  is  included 
in  rent,  as  it  should  be  if  rent  is  to  be  considered 
to  include  all  of  the  return  to  the  landlord  for  the 
use  of  land,  as  the  Ricardian  theory  defines  it,  it 
will  follow  that  even  where  the  supply  of  land  is 
beyond  the  immediate  needs  of  society,  there  is 


240  THEORY  OF  ECONOMICS 

always  some  rent  for  land  that  is  cultivated,  hence 
rent  will  form  a  part  of  price  even  under  these  cir- 
cumstances. 

But  the  conclusion  is  still  valid,  that  in  any 
given  case,  general  prices  do  not  depend  upon 
rent.  The  price  of  any  commodity  at  any  time, 
assuming  the  value  of  the  measure  to  be  con- 
stant, depends  upon  the  status  of  the  supply  of 
and  the  demand  for  the  commodity  ;  hence  the 
price  of  the  commodity  bears  no  necessary  relation 
to  the  price  that  was  paid  for  the  use  of  the  factors 
in  producing  it.  But  if  new  supplies  of  the  com- 
modity are  to  be  forthcoming,  a  price  must  be  paid 
that  will  at  least  cover  the  cost  of  production, 
which  will  include  enough  to  renew  the  efficiency 
of  the  factors.  Moreover,  since  competition  among 
the  owners  of  the  factors  does  not  alone  determine 
the  condition  of  their  availability,  for  the  supply 
of  the  factors  is  not  unlimited  and  the  purchaser 
of  their  services  has  not  always  at  his  disposal  an 
alternative,  it  may  happen  that  the  condition  of 
renewing  the  supply  of  the  commodity  will  involve 
the  payment  for  the  use  of  one  or  more  of  the  fac- 
tors, of  an  amount  above  that  required  to  renew 
the  factors,  in  which  case  the  price  of  the  commod- 
ity must  be  correspondingly  high.  So  that,  while 
the  shares  do  not  determine  the  price  of  existing 
commodities,  they  influence  that  price,  for  they 
affect  future  supply.  The  relation  of  rent  to  price, 
however,  is  not  different  in  principle  from  that  of 
interest,  profits  and  wages. 


RENT  241 

109.  Another  important  deduction  from  the 
Ricardian  theory  of  rent  is  that  rent  represents  an 
"unearned  increment,"  since  it  is  due,  not  to  the 
efforts  of  the  producer,  but  to  the  demand  of  the 
consumer.  From  this  it  is  sometimes  concluded 
that  since  rent  is  created  by  society,  it  should  go 
to  society. 

The  question  as  to  whether  society  should  appro- 
priate the  so-called  "unearned  increment"  does  not 
pertain  to  this  discussion.  It  should,  however,  be 
pointed  out  that  consistency  in  the  application  of 
such  a  policy  would  require  society  to  appropriate 
whatever  portion  of  any  of  the  shares  is  due  to  the 
superior  quality  of  the  factor  for  whose  services  it 
is  a  payment,  in  so  far  as  that  superiority  is  not  the 
sole  result  of  the  efforts  of  the  owner  of  the  factor. 
Differences  in  quality  result  in  differential  gains  to 
the  owner  of  capital,  enterprise  and  labor,  as  well 
as  to  the  owner  of  land  or  situation.  Moreover,  if 
society  is  to  appropriate  for  the  general  good,  all 
of  the  value  of  every  commodity  that  results  from 
the  demand  of  others  than  the  producer  thereof,  it 
is  difficult  to  see  where  the  limit  would  be  drawn 
between  the  "earned"  and  the  "unearned"  incre- 
ment, for  under  a  system  of  division  of  function, 
most  of  the  value  of  what  each  produces  is  due  to 
the  demand  of  others  than  himself.  Under  modern 
business  organization,  that  portion  of  the  value  of 
a  commodity  which  is  not  due  to  social  demand, 
would  not  suffice  to  pay  even  the  cost  of  produc- 
tion. 


INTEREST 


110.  Interest  is  the  return  to  the  owner  of  capital 
for  the  services  thereof.  The  amount  of  this  share 
is  determined  according  to  the  general  principles  of 
distribution  which,  as  applied  to  interest,  may  be 
thus  stated: — Interest  depends  primarily  upon  the 
value  of  the  services  of  capital ;  the  value  of  the 
services  of  capital  depends  upon  the  relation  of  the 
supply  thereof  to  the  demand  therefor.  The  amount 
of  interest  received  by  the  owner  of  capital  at  any 
time  is  determined  by  the  competitive  and  monop- 
olistic conditions  prevailing  in  connection  with  the 

Walker,  Political  Economy,  Pt.  IV.,  chapter  iii. ;  Ely, 
Outlines  of  Economics,  Bk.  II.,  Pt.  III.,  chapter  vi. ;  Clark, 
The  Distribution  of  Wealth,  (see  index);  Gide,  Political 
Economy,  trans.,  Bk.  IV.,  Pt.  II.,  chapter  iv.  (iv.); 
Marshall,  Principles  of  Economics,  Bk.  VI.,  chapters 
vi.-viii.;  Laughlm,  Elements  of  Political  Economy,  chap- 
ter xvii.;  Mill,  Principles  of  Political  Economy,  Bk.  II., 
chapter  xv.;  Sidgwick,  Principles  of  Political  Economy,  Bk. 
II.,  chapter  vi.;  Bohm-Bawerk,  Positive  Theory  of  Capital, 
trans.,  Bks.  VI.,  VII.;  Pantaleoni,  Pure  Economics,  trans., 
Pt.  III.,  chapter  iii.;  Roscher,  Political  Economy,  trans.,  Bk. 
III.,  chapter  iv.;  Von  Wieser,  Natural  Value,  trans.,  Bk. 
III.,  Pt.  III.;  Bk.  IV.,  chapters  i.-viii. 

242 


UNIVEP 

OF 


INTEREST  243 

sale  of  the  services  of  capital.  The  normal  down- 
ward limit  to  interest  is  the  smallest  amount  that 
will  suffice  to  induce  the  owner  of  capital  to  permit 
its  use,  for  if  through  the  influence  of  competition 
among  the  owners  of  capital,  interest  does  not 
equal  this  amount,  capital  remains  idle  and  the  de- 
crease in  the  available  supply  of  capital  tends  to 
check  the  fall  in  interest.  The  normal  upward  limit 
to  interest  is  the  difference  between  the  total  prod- 
uct and  the  minimum  shares  of  rent,  profits  and 
wages.  For  if  through  monopolization  by  the 
owners  of  capital,  interest  increases  so  as  to  en- 
croach upon  the  minimum  limits  of  some  of  the  other 
shares,  there  will  follow  a  decrease  in  the  available 
supply  of  the  factors  involved.  This  will  lead 
either  to  an  increase  in  the  shares  that  have  fallen 
below  the  minimum  or  to  an  impairment  of  the 
efficiency  of  production,  a  condition  that  in  itself 
will  tend  to  diminish  interest  by  decreasing  the 
amount  of  wealth  available  for  distribution. 

111.  The  difference  between  interest  as  here  de- 
fined and  the  view  often  found  in  economic  theory, 
is  due  to  differences  in  the  concept  of  capital. 
Capital  has  been  variously  defined  as  wealth  em- 
ployed in  producing  more  wealth,  or  as  wealth  that 
may  be  so  employed,  or  as  wealth  that  is  intended 
to  be  so  employed.  These  definitions,  however, 
agree  in  excepting  from  capital,  wealth  in  the  form 
of  unimproved  land  and  natural  agents,  which 
are  set  apart  as  a  distinct  factor  of  production. 
Capital  as  here  conceived  consists  of  material,1 

1See^44,  103. 


244  THEORY  OF  ECONOMICS 

whose  function  it  is  to  embody  want- attracting 
power.  According  to  this  view,  the  free  gifts  of 
nature,  such  as  soil  and  other  raw  materials,  are  as 
truly  capital  as  are  the  raw  materials  that  man  has 
improved  ;  and  the  return  for  the  use  of  soil  as  well 
as  for  the  use  of  other  forms  of  material,  is 
economic  interest. 

Interest  in  the  commercial  sense  is  a  payment  for 
the  control  of  a  certain  amount  of  value.  As  so 
viewed,  interest  is  contrasted  to  commercial  rent, 
which  is  a  payment  for  the  use  of  specific  portions 
of  wealth.1  Thus,  according  to  the  popular  view, 
if  a  man  borrows  a  piece  of  land,  a  building  and 
machinery,  for  the  purpose  of  operating  a  manu- 
facturing establishment,  he  pays  therefor  rent  (here 
designated  commercial  rent);  while  if  he  buys  these 
on  credit,  he  pays  interest  (here  designated  com- 
mercial interest) .  In  the  former  case,  it  is  expected 
that  at  the  end  of  a  certain  period,  the  specific 
commodities  will  be  returned,  with  a  recompense 
for  their  use;  while,  in  the  latter  case,  it  is  expected 
that  at  a  given  time  the  borrower  will  pay  the 
purchase  price  of  the  commodities,  together  with  a 
sum  which  will  recompense  the  lender  for  the  use 
of  this  wealth.  From  an  economic  standpoint, 
however,  both  cases  involve  a  loan  of  capital,  i.  e. , 
of  material,  and  the  amount  paid  for  the  use  thereof 
is  interest. 

As  a  rule  the  borrower  of  capital  in  actual  busi- 

1  See  3  103. 


INTEREST  245 

ness  receives  a  quantity  of  money  (or  a  title  thereto) 
with  which  he  purchases  commodities,  or  he  buys 
commodities  on  credit.  The  common  practice  of 
employing  money  in  loaning  capital  tends  to  con- 
ceal the  real  economic  character  of  the  transaction. 
For  it  leads  to  the  inference  that  loaning  capital  is 
synonymous  with  loaning  money,  whereas  what  the 
borrower  really  wants  is  a  supply  of  commodities. 
Money  in  such  transactions  is  but  the  means  through 
which  the  sale  of  the  services  of  capital  is  made. 
In  the  case  of  a  purchase  of  commodities  on  credit, 
the  economic  character  of  the  transaction  is  still 
further  obscured  by  the  fact  that  the  amount  to  be 
paid  for  the  use  of  capital,  /.  <?.,  the  interest,  is 
merged  in  the  prices  of  the  commodities,  which 
either  are  graded  according  to  the  length  of  credit 
determined  upon,  or,  more  often,  are  fixed  on  the 
assumption  that  payment  will  be  deferred  for  a  speci- 
fied time,  while  discounts  are  offered  for  earlier  pay- 
ment. Thus,  in  ordinary  business,  goods  are  often 
sold  on  the  basis  of  payment  in  90  days,  and  dis- 
counts, varying  in  amount,  are  given  for  cash  pay- 
ment or  for  payment  in  30  or  in  60  days. 

The  real  difference  between  economic  and  com- 
mercial interest  resembles  the  difference  between 
economic  and  commercial  rent,  in  that  some  of  the 
return  made  for  the  use  of  capital  as  popularly 
viewed,  often  constitutes,  from  a  scientific  stand- 
point, rent  or  return  for  situation,  just  as  some  of 
what  is  known  in  business  as  rent,  in  economic 
science  is  interest.  For  example,  if  one  buys  a 


246  THEORY  OF  ECONOMICS 

house  and  lot  on  credit,  or  through  the  use 
of  money  which  he  has  borrowed,  commercially 
speaking,  the  entire  payment  that  he  makes  for 
the  use  of  the  credit  is  interest,  whereas  from  an 
economic  standpoint  it  is  a  combination  of  in- 
terest and  rent.  A  portion  of  the  credit  repre- 
sents the  value  of  situation,  and  so  much  of  the 
payment  as  constitutes  a  return  for  this,  is 
rent;  the  remainder,  consisting  of  the  return  for 
the  use  of  capital,  is  interest.  In  a  similar 
manner,  as  has  been  seen,  that  which  the  lessee 
of  a  house  pays  is,  commercially  speaking,  rent, 
while  in  economic  science  it  consists  of  both 
rent  and  interest.  The  portion  that  goes  for  the 
use  of  economic  capital  is  interest;  the  balance,  be- 
ing a  payment  for  the  use  of  situation,  is  rent. 
But  economic  and  commercial  interest  are  alike  in 
this,  that  however  capital  may  be  defined,  the  re- 
turn for  its  use  depends  upon  the  relation  between 
the  supply  thereof  and  the  demand  therefor. 

112.  While  situation  is  immovable  and,  therefore, 
subject  to  fluctuations  in  supply  only  as  population 
changes  or  as  the  facilities  for  transportation  are 
altered,  capital  in  many  of  its  forms  possesses  a 
high  degree  of  mobility.  Wheat  is  transported 
from  the  fields  of  Dakota,  Argentine  Republic  and 
India  to  England;  cotton,  grown  in  Texas  or  India 
or  Egypt,  is  manufactured  in  England;  the  tea  of 
China  and  the  coffee  of  Brazil  find  markets  in  every 
quarter  of  the  globe;  and  these  are  but  types  of 
many  forms  of  capital.  The  effect  of  this  trans- 


INTEREST  247 

ferability  of  capital  is  a  tendency  to  equalize  the 
relative  influence  of  competition  and  monopolization 
in  determining  interest  in  different  places,  with  the 
result  that  the  returns  for  the  use  of  capital  of  the 
same  quality  tend  to  be  the  same  regardless  of  the 
location  of  the  demand  for  it.  For  should  the  de- 
mand for  capital  in  one  place  exceed  that  in  another, 
thus  leading  to  a  higher  return  for  its  use  in  the 
former  locality,  capital  will  tend  to  flow  to  that 
place  where  the  return  is  highest  and  away  from 
the  locality  where  the  return  is  lowest,  with  the 
result  of  equalizing  the  relation  between  demand 
and  supply  in  both  places. 

Important  as  is  the  mobility  of  capital,  its  equal- 
izing influence  upon  rates  of  interest  represents  at 
most  but  a  tendency.  Various  circumstances  may 
lead  to  different  returns  for  capital  in  different  locali- 
ties, and,  indeed,  for  different  portions  of  capital  in 
the  same  locality.  Thus  the  general  industrial  con- 
dition and  the  political  status,  as  affecting  the  cer- 
tainty of  investments  and  the  security  of  contracts, 
exert  a  marked  influence  upon  interest.  In  old  com- 
munities, where  business  conditions  are  settled  and 
legal  institutions  are  well  established,  industrial 
undertakings  will  give  a  comparatively  sure,  if  small, 
return,  and  contracts  will  be  promptly  and  surely  en- 
forced. The  return  for  the  use  of  capital  will  tend 
to  be  less  in  such  places  than  in  new  regions  where 
business  ventures  involve  greater  uncertainty  and 
where,  law  and  order  being  less  firmly  established, 
the  fulfillment  of  contracts  is  less  sure.  The  larger 


248  THEORY  OF  ECONOMICS 

returns  for  capital  received  under  these  conditions 
has  been  considered  by  some  as  a  distinct  share, 
called  premium  for  insurance.1  Fundamentally, 
however,  it  is  a  difference  in  amount  paid  due  to 
differences  in  the  relation  of  the  supply  of  capital 
to  the  demand  therefor.  When  returns  for  the 
use  of  capital  are  more  certain,  the  supply  available 
relative  to  demand  will  be  greater  than  when  such 
returns  are  less  certain,  hence  the  interest  will  be 
lower  under  the  former  than  under  the  latter  con- 
ditions. 

Variations  in  the  return  for  the  services  of 
capital  may  be  caused  also  by  variations  in  the  de- 
gree of  mobility  of  capital.  Though  capital  in  many 
of  its  forms  possesses  a  high  degree  of  mobility, 
it  is,  of  course,  not  capable  in  any  event  of  abso- 
lutely free  movement,  and,  under  some  conditions, 
it  cannot  be  transferred  from  one  industry  to  an- 
other except  at  great  loss.  This  is  especially  true 
of  investments  in  railroads  and  other  industries  in- 
volving large  amounts  of  fixed  capital.  Such  capital 
in  the  form  of  iron  and  other  raw  materials  may 
possess  a  high  degree  of  mobility  before  being 
so  invested,  and  but  little  afterward.  Hence, 
when  conditions  favor  high  returns  to  these  in- 
vestments, the  supply  of  capital  can  be  increased 
with  comparative  ease;  but  once  invested,  a  falling 
off  in  returns  cannot  be  followed  readily  by  a  de- 
crease in  the  supply,  for  the  materials  used  in  such 

1  Walker,  Political  Economy,  p.  225. 


INTEREST  249 

industries  become  from  the  fact  of  such  investments, 
less  adapted  to  others. 

Such  differences  in  the  returns  for  the  use  of 
capital  as  are  due  to  varying  security  for  the  loans, 
manifest  themselves  in  the  rate  of  interest.  Thus 
a  well  established  government  can  now  borrow  at 
the  rate  of  from  2%  to  3%;  and  capital  for  use  in 
private  industry,  in  well  established  communities 
where  the  security  offered  is  good,  brings  only  from 
3%  to  6%;  while  capital  in  new  communities  where 
the  risk  is  greater,  may  bring  from  10%  to  15%  or 
even  more.  On  the  other  hand,  variations  in 
the  returns  for  capital  which  are  due  to  dif- 
ferences in  mobility,  may  or  may  not  show 
themselves  in  the  rate  of  interest.  Whether  they 
do  or  do  not,  depends  upon  the  method  employed 
for  estimating  interest.  Where  it  is  estimated  on 
the  basis  of  an  original  investment,  differences  in 
interest  will  manifest  themselves  in  the  rate,  as  in 
the  case  of  dividends  on  stock,  a  portion  of  which 
constitutes  interest.  But  instead  of  affecting  the 
rate,  the  influence  of  varying  returns  may  show 
itself  in  the  valuation  of  the  capital  itself,  as  would 
be  the  case  if  the  capital  were  sold,  when  it  would 
be  valued  by  capitalizing  its  earning  capacity  at  the 
current  rate  of  interest. 

113.  The  normal  minimum  limit  to  interest  is 
the  smallest  amount  that  will  suffice  to  induce  the 
owner  of  capital  to  make  it  available.  In  many 
cases,  until  capital  has  become  fixed  in  a  permanent 
investment,  there  is  offered  to  the  owner  the  alter- 


250  THEORY  OF  ECONOMICS 

native  of  consuming  it  in  the  final  satisfaction  of 
his  wants,  in  which  case,  except  as  this  fits  him  for 
more  efficient  service,  future  production  will  suffer. 
To  maintain  and  increase  the  capital  fund  of  soci- 
ety, the  return  to  the  owner  of  capital  for  its  use, 
must  be  sufficiently  large  to  induce  him  to  prefer  to 
employ  it  in  other  ways  than  in  the  satisfaction  of 
his  final  desires. 

In  general,  the  more  permanent  the  nature  of 
an  investment,  the  more  intense  will  be  the  com- 
petition between  industries,  when  they  serve  the 
same  demand ;  and  because  of  this,  interest  on  the 
capital  that  becomes  fixed,  may  be  forced  far  below 
the  cost  of  reproducing  it.  Indeed,  on  the  principle 
that  some  return  is  better  than  nothing,  competition 
may  drive  the  returns  of  such  investments  almost 
to  the  cost  of  conducting  the  business.  And  though 
a  limit  to  the  influence  of  competition  in  lowering 
the  returns  in  these  industries  may  be  set  by  the 
possible  gain  from  a  transfer  of  the  capital  to  some 
other  industry,  it  not  infrequently  happens  that,  in 
the  hope  of  driving  the  competitor  from  the  field 
and  of  ultimately  increasing  the  gain,  the  struggle 
between  rivals  becomes  so  intense  that  interest  en- 
tirely disappears.  In  the  long  run,  however,  in- 
terest can  not  remain  below  the  cost  of  renewing 
the  efficiency  of  capital,  for  when  interest  falls  be- 
low this,  the  process  of  production  is  impaired  and 
economic  decay  sets  in. 

There  is  also  a  maximum  limit  to  interest,  which 
is  fixed  by  the  minimum  limits  of  the  other  shares. 


INTEREST  251 

Should  the  owners  of  capital  be  able  to  increase  the 
price  of  its  use  so  as  to  encroach  upon  the  minimum 
limits  of  the  other  shares,  the  borrowing  of  capital 
would  become  unproductive  to  the  borrower.  A  re- 
duction in  interest  would  then  follow  either  through 
a  decrease  in  the  demand  of  the  borrowers  or  through 
an  impairment  of  the  productive  process,  which 
would  decrease  the  fund  available  for  distribution. 

114.  As  the  return  for  the  use  of  capital  depends 
upon  the  relation  of  the  supply  of  capital  to  the 
demand  therefor,  and  the  process  of  borrowing  is 
often  effected  through  the  use  of  money,  a  belief 
exists  that  interest  depends  upon  the  amount  of 
money.  A  large  supply  of  money  is  supposed  to 
result  in  low  rates  of  interest,  while  a  high  rate  of 
interest  is  supposed  to  indicate  a  scarcity  of  money. 
Because  of  this  opinion,  there  arises,  not  infre- 
quently, a  demand  that  the  supply  of  money  shall 
be  increased  in  order  to  enable  borrowers  to  secure 
the  use  of  capital  at  less  expense. 

At  the  basis  of  this  demand,  is  the  mistaken  idea 
that  in  borrowing  one  desires  primarily  money, 
whereas  the  fundamental  desire  is  for  commodities. 
"The  amount  to  be  paid  for  the  use  of  capital 
will  depend  upon  its  abundance  compared  with 
the  occasion  for  its  use.  The  issue  of  money  will 
not  increase  the  number  of  horses  and  cattle  and 
plows  nor  will  it  build  shops  and  warehouses  or 
construct  machinery  for  manufacture  or  transport. 
If  the  people  of  a  community  be  thriving  and  pro- 
gressive, the  demand  for  capital  to  start  new  enter- 


252  THEORY  OF  ECONOMICS 

prises  or  to  enlarge  those  already  established,  will 
be  very  great.  If  the  community  be,  also,  young, 
having  brought  to  new  fields  the  social  and  industrial 
ideas,  tastes  and  ambitions  of  an  old  society,  the 
supply  of  capital  will  be  scanty,  and  the  rate  of 
interest  will  rule  high.1 ' ' 

Moreover,  the  misfortune  involved  in  a  condition 
where  a  high  rate  of  interest  prevails  does  not  con- 
sist primarily  in  the  high  rate  but  in  the  scarcity  of 
capital,  an  evil  which  the  high  rate  tends  to  remedy, 
since  it  will  induce  men  to  apply  less  wealth  to  the 
gratification  of  their  immediate  desires,  thereby 
rendering  more  wealth  available  for  application  in 
other  directions. 

On  the  other  hand,  '  'a  low  rate  of  interest  may 
mean  that,  in  a  thriving,  progressive  community 
the  accumulation  of  capital  has  gone  on  so  rapidly 
as  to  outrun  the  occasions  for  its  productive  use. 
It  may  mean  that  the  people  are  so  dull,  indolent 
and  unambitious,  or  the  state  of  society  so  disor- 
dered, that  commercial  and  manufacturing  enter- 
prises are  not  undertaken,  and  no  enlargement  of 
traditional  industries  is  looked  for.  A  small  amount 
of  capital  more  than  suffices  for  such  scanty  needs."2 

It  will  not  suffice,  however,  to  dismiss  the  ques- 
tion of  the  relation  of  money  to  interest  with  the 
statement  that  interest  is  not  determined  by  the 
supply  of  money.  For  the  supply  of  money  affects 

1  Walker,  Political  Economy,  p.  220  et  seq.     2  Ibid,  p.  221. 


INTEREST  253 

the  facilities  for  transferring  ownership  and  thereby 
influences  the  relation  of  the  supply  of  and  the  de- 
mand for  capital.  Hence  the  supply  of  money 
affects  interest.  While  an  issue  of  money  is  not 
identical  with  the  production  of  "horses  and  cattle 
and  plows' '  or  with  the  building  of  warehouses  or 
the  construction  of  "machinery  for  manufacture 
and  for  transport,"  the  productive  operations  are 
all  affected  by  the  monetary  system.  It  is  impor- 
tant to  emphasize  both  that  the  rate  of  interest 
is  not  determined  by  the  supply  of  money  and 
also  that  it  is  not  independent  of  the  supply  of 
money. 

The  theory  that  the  rate  of  interest  is  independ- 
ent of  the  supply  of  money  is  based  upon  the  as- 
sumption that  prices  of  commodities  will  change 
with  changes  in  the  supply  of  money,  and  that  the 
general  conditions  of  the  supply  of  and  the  demand 
for  capital  are  not  affected  by  such  changes  in  the 
prices  of  commodities  as  result  from  changes  in 
the  supply  of  money.  The  borrower  desires  to  se- 
cure a  certain  amount  of  value,  and  since  price  is 
but  the  estimate  of  the  value  of  one  commodity  in 
terms  of  some  other,  it  would  seem  to  follow  that  if 
the  supply  of  the  other  commodity  increases,  thereby 
decreasing  its  value,  the  price  of  the  first  commodity 
will  increase  accordingly,  even  though  its  value  re- 
mains the  same.  After  such  a  change  in  the  value 
of  the  measure,  the  price  of  that  which  is  borrowed 
is  greater,  but  if  its  value  remains  the  same,  the 
rate  of  interest  is  unchanged.  Thus,  suppose  a 


254  THEORY  OF  ECONOMICS 

manufacturer  of  clothing  desires  to  borrow  1,000 
yards  of  cloth,  for  the  use  of  which  he  is  willing  to 
pay  50  yards,  i.  e. ,  5  per  cent.  If  at  a  given  sup- 
ply of  money  the  price  of  that  cloth  is  $1.00  a  yard, 
he  will  borrow  $1,000  and  pay  therefore  $50.  If 
now  as  a  result  of  an  increase  in  the  supply  of 
money,  its  value  decreases  one-half,  while  the  value 
of  the  cloth  remains  the  same,  the  price  of  a  yard 
of  cloth  (in  terms  of  money)  will  become  $2.00. 
And  to  secure  1,000  yards,  the  manufacturer  must 
borrow  $2,000,  for  the  use  of  which  he  gives  50 
yards  or  $100,  which  is,  as  before,  5  per  cent.  To 
the  extent,  then,  that  changes  in  the  supply  of 
money  are  followed  by  changes  in  the  prices  of  com- 
modities which  correspond  exactly  to  the  changes 
in  the  value  of  money,  while  other  conditions  remain 
unchanged,  the  rate  of  interest  remains  the  same. 
When,  however,  the  conditions  assumed  as  the 
basis  of  the  theory  that  interest  is  independent  of 
the  supply  of  money,  are  compared  with  the  actual 
workings  of  the  economic  process,  it  will  be 
found  that  changes  in  the  supply  of  money 
which  do  not  affect  the  rate  of  interest  are  the 
exception  rather  than  the  rule.  On  the  one  hand, 
there  is  at  any  given  time  a  large  body  of  prices 
that  are  unaffected  by  changes  in  the  value  of 
money,  for  the  prices  involved  in  credit  transactions 
are  fixed.  Hence  in  so  far  as  the  demand  for  capital 
is  a  demand  for  wealth  to  meet  existing  obligations, 
changes  in  the  supply  of  money  will  affect  the  rate 
of  interest,  in  accordance  with  the  general  law  of 


INTEREST  255 

value.  And,  even  though  the  entire  influence  of 
changes  in  the  supply  of  money  were  exerted 
through  the  relation  of  money  to  contracts,  the 
effect  of  such  changes  on  the  rate  of  interest, 
would  not  stop  with  the  contracts  themselves,  be- 
cause the  conditions  affecting  the  liquidation  of 
existing  contracts  influence  the  formation  of  new 
ones.  The  demand  for  any  and  every  commodity 
and,  therefore,  the  demand  for  capital  in  all  its 
forms,  are  affected  by  such  changes  in  the  supply 
of  money  as  alter  the  conditions  of  the  fulfillment 
of  obligations. 

But  the  influence  of  changes  in  the  supply  of 
money  on  interest  is  not  limited  to  that  which  is 
exerted  through  contracts.  Changes  in  price, 
whether  due  to  changes  in  the  value  of  commodities 
or  to  changes  in  the  value  of  money,  affect  directly 
the  demand  for  and  the  supply  of  commodities. 
Hence  changes  in  price,  from  whatever  cause,  affect 
the  demand  for  the  capital  required  to  produce 
commodities,  and,  through  this,  the  interest  upon 
such  capital.  Business  may  be  hampered  by  an 
inadequate  or  a  superabundant  supply  of  money, 
through  which  ownership  in  values  is  transferred, 
just  as  truly  as  by  an  inadequate  or  superabundant 
supply  of  railroads,  through  which  the  commodi- 
ties themselves  are  transported ;  and  whatever  im- 
pedes or  promotes  business,  affects  the  demand  for 
the  factors  of  production  and,  therefore,  the  returns 
for  the  services  of  these  factors. 

While,  however,  changes  in  the  supply  of  money 


256  THEORY  OF  ECONOMICS 

affect  interest  through  their  influence  upon  busi- 
ness conditions,  it  is  not  to  be  inferred  that  interest 
can  be  controlled  by  arbitrary  readjustments  of 
the  supply  of  money.  It  is  absolutely  impossible 
to  foretell  the  effects  of  changes  in  the  supply  of 
money  upon  interest,  because  it  is  impossible  to 
foretell  the  effect  of  a  given  change  in  the  supply 
of  money  upon  the  relation  between  demand  and 
supply  as  they  concern  capital.  An  increase  in  the 
supply  of  money  by  increasing  prices  may  quicken 
business  activity  and  promote  economic  prosperity, 
thereby  enlarging  the  demand  for  capital  and  in- 
creasing the  interest  returns  therefor  ;  but  if  the 
supply  of  money  exceeds  the  needs  of  business,  it 
leads  to  inflation  of  prices  and  disaster,  followed 
by  a  decrease  in  the  demand  for  capital.  On  the 
other  hand,  the  increase  in  prices  resulting  from  an 
increase  in  the  supply  of  money,  may  lead  to  such 
a  decreased  demand  for  commodities  by  purchasers 
as  to  decrease  the  demand  for  capital  and  lower  the 
interest  thereon.  A  decrease  in  the  supply  of 
money  may  produce  exactly  the  opposite  effects, 
leading  to  lower  prices  and  business  contraction, 
partly  or  wholly  offset  by  increased  demand  for 
commodities  because  of  low  prices. 

There  is  no  more  important  or  certain  teaching 
of  economic  experience  than  that  the  attempt  arbi- 
trarily to  adjust  the  supply  of  money  to  the  needs 
of  business  cannot  succeed.  An  adequate  monetary 
system  must  contain  within  itself  the  capacity  to 
increase  and  decrease  the  supply  of  money  according 
to  changes  in  the  demand  for  it. 


PROFITS 


115.  Profits  are  the  return  to  the  possessors  of 
enterprise  for  the  services  thereof.  The  principles 
of  distribution  as  applied  to  profits  may  be  thus 
stated: — Profits  depend  primarily  upon  the  value  of 
the  services  of  enterprise;  the  value  of  the  services 
of  enterprise  depends  upon  the  relation  of  the  supply 
thereof  to  the  demand  therefor.  The  amount  of 
profits  received  at  any  time  is  determined  by  the 
competitive  and  monopolistic  conditions  prevailing 
in  connection  with  the  sale  of  the  services  of  enter- 
Walker,  Political  Economy,  Pt.  IV.,  chapter  iv.;  Laugh- 
lin,  Elements  of  Political  Economy,  chapter  xx.;  Clark, 
The  Distribution  of  Wealth,  (see  index);  Gide,  Political 
Economy,  trans.,  Bk.  IV.,  Pt.  II.,  chapter  ii.;  Ely,  Outlines 
of  Economics,  Bk.  II.,  Pt.  III.,  chapters  v.,  vi.;  Pantaleoni, 
Pure  Economics,  trans.,  Pt.  III.,  chapter  iv.,  §  5;  Roscher, 
Political  Economy,  trans.,  Bk.  III.,  chapter  v.;  Marshall, 
Principles  of  Economics,  Bk,  VI.;  chapters  vii.,  viii.;  Mill, 
Principles  of  Political  Economy ,  Bk.  II.,  chapter  xv.;Sidg- 
wick,  Principles  of  Political  Economy,  Bk.  II.,  chapter  ix. 
See  also  in  the  Quarterly  Journal  of  Economics,  Vol.  vii., 
459-479,  "The  Risk  Theory  of  Profit,"  and  Vol.  xv.,  75-105, 
"Enterprise  and  Profit,"  by  F.  B.  Hawley  ;  and  Vol.  ix., 
409-449,  "Risk  as  an  Economic  Factor,"  by  John  Haynes. 

257 


258  THEORY  OF  ECONOMICS 

prise.  The  normal  downward  limit  to  profits  is  the 
smallest  amount  that  will  suffice  to  induce  the  pos- 
sessor of  enterprise  to  make  it  available;  for  if 
through  the  influence  of  competition  among  the 
possessors  of  enterprise,  profits  fall  below  this  point, 
enterprise  remains  idle,  and  the  decrease  in  the 
available  supply  of  enterprise  tends  to  check  the 
fall  in  profits.  The  normal  upward  limit  to  profits 
is  the  difference  between  the  total  product  and  the 
mininum  shares  of  rent,  interest  and  wages.  For 
if  through  monopolization  by  the  possessors  of 
enterprise,  profits  are  increased  so  as  to  encroach 
upon  the  mininum  limits  of  the  other  shares,  there 
will  follow  a  decrease  in  the  available  supply  of  the 
factors  involved.  This  will  lead  either  to  an  in- 
crease of  the  shares  that  have  fallen  below  the 
mininum  or  to  an  impairment  of  the  efficiency  of 
production,  a  condition  that  in  itself  will  tend  to 
diminish  profits  by  decreasing  the  amount  of  wealth 
available  for  distribution. 

116.  The  fact  that  profits  are  the  return  to  the 
owners  of  enterprise  for  the  services  thereof  and 
that  they  are  determined  by  the  relation  of  the  sup- 
ply of  enterprise  to  the  demand  therefor,  is  obscured 
by  the  process  through  which  the  owner  of  enter- 
prise receives  his  share.  Before  the  development 
of  the  economic  organization  had  resulted  in  differ- 
entiation of  the  ownership  of  the  various  factors, 
each  producer  was  the  possessor  of  the  situation, 
capital,  enterprise  and  labor  employed  in  his  in- 
dustry. Under  such  an  arrangement  each  indi- 


PROFITS  259 

vidual  owned  the  product  of  his  industry,  and  his 
share  depended  directly  upon  the  value  of  that  prod- 
uct. It  was  impossible  to  say  how  much  of  this 
product  constituted  the  several  shares,  rent,  interest, 
profits  and  wages.  The  same  is  true  of  many  busi- 
ness undertakings  today,  and  especially  of  such  as 
are  conducted  on  the  margin  of  cultivation,  z.  e., 
where  the  total  product  is  required  to  pay  the  ex- 
pense of  production.  The  amount  of  the  various 
shares  under  such  circumstances  can  be  estimated 
only,  by  assuming  that  each  equals  that  which  is 
received  where  the  factors  are  owned  by  different 
persons,  an  assumption  that  must  necessarily  re- 
main purely  hypothetical. 

Through  the  process  of  differentiation  of  the 
ownership  of  the  factors,  it  has  resulted  that  the 
services  of  situation,  capital  and  labor  have  become 
objects  of  direct  purchase  and  sale,  while  the 
owner  of  enterprise  retains  the  status  of  the  pro- 
ducer in  the  earlier  condition,  in  that  he  owns  the 
output  of  the  productive  operation,  subject  to 
such  liens  as  are  involved  in  his  obligations  to  the 
owners  of  the  other  factors.  Hence  the  owner  of 
enterprise  receives  his  share  through  the  sale  of 
the  commodity  produced  and  after  payment,  from 
the  proceeds  of  such  sale,  of  the  amounts  due  the 
owners  of  situation,  capital  and  labor.  The  process 
of  buying  and  selling  enterprise  is  involved  in  the 
buying  and  selling  of  general  commodities.  But 
this  peculiarity  of  the  method  of  remunerating  the 
services  of  enterprise  does  not  prevent  the  work- 


260  THEORY  OF  ECONOMICS 

ing  of  the  law  of  supply  and  demand  in  determining 
profits.  So  far  as  any  given  undertaking  is  concerned, 
the  owner  of  enterprise  is  the  residual  claimant, 
i.  e.,  he  pays  the  expenses,  consisting  of  the  returns 
for  situation,  capital  and  labor,  and  then  takes  what 
is  left.  But  it  is  not  to  be  inferred  from  this,  that 
the  amount  which  goes  as  profits  is  the  result  of 
chance.  Unless  the  remuneration  for  the  services 
of  situation  is  sufficient  to  induce  the  possessor  of 
enterprise  to  undertake  an  industry,  there  is  no  de- 
mand for  and,  therefore,  no  return  to  the  other 
factors.  Much  uncertainty  may  attend  the  amount 
of  profits  so  far  as  any  individual  enterprise  is  con- 
cerned, but  in  the  long  run  a  portion  of  product 
must  go  to  the  possessor  of  enterprise. 

The  nature  of  enterprise  is  such  that  the  supply 
is  not  easily  increased  to  meet  demand.  This 
fact  tends  to  emphasize  the  influence  of  monop- 
olization in  regulating  the  returns  for  the  services 
of  enterprise.  Especially  is  this  true  in  the  case  of 
new  undertakings,  whether  they  involve  the  pro- 
duction of  a  new  commodity,  or  the  extension  of 
the  scope  of  existing  industries.  To  interpret  ac- 
curately the  conditions  of  supply  and  demand  and 
to  adjust  the  one  to  the  other,  when  it  is  proposed 
to  essay  the  production  of  a  new  commodity  or  to 
put  into  operation  an  undertaking  of  great  size, 
where  the  possibilities  of  failure  are  increased  by 
the  complexities  and  vastness  of  the  organization 
and  the  variety  of  the  elements  involved,  require 
enterprise  of  a  high  order,  the  supply  of  which  is 


PROFITS  261 

not  susceptible  to  increase  by  the  mere  increase  of 
population.  Hence  the  possessors  of  such  enterprise 
exercise  a  large  power  of  control  in  the  sale  of 
its  services.  And  as  the  importance  to  economic 
progress  of  changes  in  the  nature  and  magni- 
tude of  undertakings  increases,  the  demand  for 
enterprise  increases,  and  with  it  the  necessity  of 
giving  for  the  services  of  enterprise  such  an  amount 
of  product  as  shall  attract  an  adequate  supply 
thereof. 

Another  important  characteristic  of  enterprise 
is  found  in  the  variety  of  grades  in  which  it  ap- 
pears. Some  degree  of  enterprise,  as  has  been  ob- 
served, is  inseparable  from  all  activity,  but  there  is  a 
vast  difference  between  the  enterprise  that  leads  one 
to  act  where  the  task  is  simple  and  the  returns  well- 
nigh  sure,  as  in  the  case  of  the  ordinary  forms  of 
labor,  and  that  which  is  required  in  the  large  rail- 
road and  mercantile  operations  of  modern  industry. 
These  differences  in  the  grade  of  enterprise  result  in 
differences  in  the  returns  for  the  services  of  enter- 
prise. The  amount  of  profits  that  suffices  to  pay 
for  the  enterprise  involved  in  running  a  small 
country  grocery  store  and  that  which  affords  the 
proper  remuneration  for  the  enterprise  essential  to  a 
transcontinental  railroad  are  vastly  different.  But 
the  difference  between  the  profits  actually  accruing 
from  such  undertakings  is  not  greater  than  the 
difference  between  the  value  of  the  services  of  the 
enterprise  involved. 

The  minimum  of  profits  is  the  smallest  amount 


262  THEORY  OF  ECONOMICS 

that  will  induce  the  possessor  of  enterprise  to 
act.  If  economic  efficiency  is  to  be  maintained, 
profits  must  suffice  to  maintain  the  efficiency  of 
enterprise.  But  in  very  many  instances,  the  pos- 
sessor of  enterprise  supplies  also  the  labor  and  per- 
haps the  capital  and  situation,  and  may  engage  in 
business  for  himself  merely  because  of  the  satisfac- 
tion arising  from  being  an  independent  producer, 
even  when  the  total  income  so  obtained  is  no  larger 
than  he  could  get  by  selling  to  others  the  use  of  his 
situation,  capital  and  labor.  Under  these  con- 
ditions the  gratification  of  the  desire  to  be  one's  own 
employer  constitutes  part  of  the  return  to  the  pos- 
sessor of  enterprise,  while  the  amount  of  each  of 
the  several  shares,  as  has  been  said,  cannot  be  dis- 
tinguished. 

117.  The  existence  of  marked  differences  in  grades 
of  enterprise,  and  the  fact  that,  under  some  circum- 
stances, a  very  low  minimum  of  profits  suffices  to 
induce  enterprise  to  act,  have  led  to  a  theory  of 
profits  akin  to  the  Ricardian  doctrine  of  rent,  and 
called  after  that,  the  "rent  theory  of  profits."1 
According  to  this  theory,  if  (1)  "the  number  of  men 
of  exceptional  abilities  were  sufficient  or  more  than 
sufficient  to  do  all  the  business  that  required  to  be 
done,  of  all  sorts  and  in  all  places;  if  (2)  these 
men,  however  much  surpassing  all  other  members 
of  the  industrial  society,  were  themselves  equal  in 
all  respects  which  concern  the  conduct  of  business; 

1  Walker,  Political  Economy,  p.  232  et  seq. 


PROFITS  263 

and  if  (3)  this  class,  so  constituted,  and  so  endowed, 
were  distinguished  from  all  not  of  their  class  so 
clearly  and  conspicuously  that  no  one  having  these 
exceptional  abilities  should  fail  to  be  recognized, 
and  no  one  lacking  such  abilities  in  the  full  measure 
should  esteem  himself  capable  of  conducting  busi- 
ness, or  be  so  esteemed,  for  the  purpose  of  obtaining 
credit,  we  should  have  a  situation  closely  analogous 
to  that  *  *  in  the  case  of  a  community  near 
which  was  found  an  amount  of  good  land,  of  uni- 
form quality,  adequate,  or  more  than  adequate,  to 
raise  all  produce  required  for  the  support  of  the 
community." 

In  the  absence  of  combination  among  the  mem- 
bers of  this  class,  competition,  it  is  said,  will  bring 
their  return  "to  so  low  a  point  that  the  remunera- 
tion of  each  and  every  one  of  this  class  would  be 
practically  equal  to  what  he  would  receive  if  employed 
by  another}-  This,  which  we  might  call  the  no- 
profit  stage  of  industrial  society,  corresponds  closely 
to  the  no-rent  stage  in  the  cultivation  of  the  soil. 
The  persons  remaining  in  the  conduct  of  business, 
would  earn  their  necessary  subsistence  and  no 
more." 

As  a  matter  of  fact,  however,  there  are  wide 
differences  in  business  ability,  from  "those  rarely 
gifted  persons,  who,  in  common  phrase,  seem  to 
turn  everything  they  touch  into  gold,"  to  "the 
multitude  of  men  who  are  found  in  the  control  of 

1  Not  italicized  in  the  original. 


264  THEORY  OF  ECONOMICS 

business  enterprises  for  no  good  reason;  men  of 
checkered  fortunes,  sometimes  doing  well  but  more 
of  ten  ill."  Those  of  this  lowest  order  of  ability 
constitute  the  '  'no-profit"  class  of  employers,  who 
live  "partly  by  legitimate  toll  upon  the  business 
that  passes  through  their  hands,  partly  at  the  cost 
of  their  creditors,  with  whom  they  make  frequent 
compositions,  partly  at  the  expense  of  friends, 
or  by  the  sacrifice  of  inherited  means.  This  bare 
existence,  obtained  through  so  much  of  hard  work, 
of  anxiety  and  often  of  humiliation,  we  regard  as 
that  minimum  which  in  economics,  we  can  treat 
as  nil  (sic}.  From  this  low  point  upwards  we 
measure  profits. ' ' 

From  this  theory  there  might  be  formulated  the 
following  law  of  profits,  adapted  from  the  Ricardian 
law  of  rent: — 

1.  Profits  arise  out  of  differences  existing  in  the 
productiveness  of  different  portions  of  enterprise  in 
use  at  the  same  time  for  supplying  the  same  market. 

2.  The  amount  of  profits  is  determined  by  the 
degree  of  those  differences.     Specifically,  the  profits 
from  any  undertaking  are  determined  by  the  dif- 
ference between  the  efficiency  of  the  enterprise  in- 
volved  and  the  least  efficient  enterprise  in  use  to 
supply  the  same  market,  under  equal  applications 
of  situation,  capital  and  labor,  it   being  assumed 
that  the  quality  of  the  enterprise  as   a  productive 
agent  is,   in  neither  case,  impaired  or  improved  by 
such  use. 

118.  This   theory   is   open    to   substantially  the 


PROFITS  265 

same  criticism  as  the  Ricardian  doctrine  of  rent. 
It  will  be  observed  that  the  "no-profits"  employer 
is  either  one  whose  profits  are  very  small,  in  which 
case  the  theory  proposes  to  ignore  them  altogether, 
in  entire  disregard  of  the  requirements  of  scientific 
investigation,  or  he  is  an  employer  whose  income  is 
'  'practically  equal  to  what  he  would  receive  if  em- 
ployed by  another,"  /.  e.}  to  what  he  would  secure 
as  a  laborer.  The  fallacy  involved  in  declining  to 
call  a  share  profits,  when  it  is  return  for  the  services 
of  enterprise,  just  because  the  amount  is  no  more 
than  could  be  secured  as  wages,  is  apparent.  If,  as 
the  "rent  theory"  assumes,  profits  are  remunera- 
tion for  organizing  and  conducting  production,1 
then  the  portion  of  product  that  goes  to  pay  for 
this  service  should  be  called  profits  whether  it  is 
large  or  small.  Moreover,  for  scientific  purposes,  it 
must  be  recognized  in  whatever  form  and  to  what- 
ever extent  it  exists. 

The  essential  truth  in  the  rent-theory  of  profits 
is  the  same  as  that  which  remains  to  the  Ricardian 
doctrine  of  rent  after  the  hypotheses  have  been 
reduced  to  conform  to  facts  and  the  definition  of 
the  share  is  interpreted  in  harmony  with  the 
definitions  of  the  other  shares,  so  as  to  include  all 
the  return  for  the  services  of  enterprise.  Differ- 
ences in  efficiency  exist  in  enterprise  as  in  the 
other  factors,  with  the  result  that  those  possessing 
the  higher  grades  can  avail  themselves  of  monop- 

1  Walker,  Political  Economy,  p.  232. 


266  THEORY  OF  ECONOMICS 

olization  to  the  extent  of  securing  most  or  all  of  the 
increase  in  product  that  results  from  their  increased 
efficiency.  But  this,  as  has  been  seen,  is  equally 
true  of  all  the  factors  of  production,  though  the 
fact  may  sometimes  be  concealed  by  the  method  of 
estimating  the  shares. 

119.  The  rent-theory  of  profits  resembles  the 
Ricardian  doctrine  of  rent  also  in  the  conclusion 
drawn  from  it  as  to  the  relation  of  profits  and  prices. 
''Profits,"  it  is  said,1  "do  not  form  a  part  of  the 
price  of  manufactured  products,"  by  which  is 
meant,  as  in  the  case  of  rent,  that  the  price  of  com- 
modities produced  under  the  most  unfavorable 
conditions  actually  employed,  does  not  include  any 
profit  because  no  profit  exists  there.  And  since 
the  price  under  such  conditions  determines  the 
price  everywhere,  profits  do  not  form  a  part  of  any 
price.  The  basis  of  this  conclusion  is  the  assumed 
existence  of  no-profit  enterprise,  an  assumption 
that  is  contrary  to  fact.  Indeed,  the  same  criticism 
that  was  made  against  the  similar  conclusion  in 
connection  with  rent,  applies  here.2 

It  is  undoubtedly  true  that  the  price  of  any  com- 
modity at  a  given  time  does  not  depend  upon  profits, 
nor  does  it  depend  directly  upon  any  or  all  of  the 
shares.  Price  is  a  comparative  estimate  of  values 
and  these  depend  upon  the  relation  of  the  supply 
of  to  the  demand  for  the  commodities  concerned. 
In  general,  too,  the  shares  depend  upon  prices 

1  Walker,  Political  Economy,  p.  239.         2  See  §  108. 


PROFITS  267 

rather  than  prices  upon  the  shares.  Where  commod- 
ities are  produced  for  sale,  the  amount  to  be  dis- 
tributed among  the  owners  of  the  factors  is  the 
amount  received  from  such  sale.  Moreover,  in 
actual  business,  profits  are  more  directly  affected  by 
variations  in  the  prices  of  commodities  than  are  the 
other  shares;  for  rent,  interest  and  wages  are  often 
paid  out  of  wealth  which  has  been  advanced  for 
that  purpose,  while  the  receipt  of  profits  may  wait 
upon  the  sale  of  the  commodities  produced.  But, 
as  has  been  seen,  if  new  supplies  of  any  commodity 
are  to  be  forthcoming,  the  price  received  at  any 
given  time  must  be  sufficient  to  pay  the  rent,  inter- 
est, profits  and  wages,  which  are  necessary  to 
secure  the  activity  of  the  factors.  So  that  the 
prices  of  commodities  are  influenced  by  the  shares, 
for  these  affect  the  future  supply  of  and  demand 
for  commodities. 

The  attempt  to  show  that  prices  are  independent 
of  profits  and  a  somewhat  similar  attempt  to  show 
that  profits  cannot  normally  affect  wages,1  result 
apparently  from  a  desire  to  justify  the  existence 
of  profits  and  to  demonstrate  that  the  '  laborer 
suffers  no  loss  in  wages  because  of  profits.  The 
existence  of  profits  should  require  no  justification. 
The  services  of  enterprise  are  indispensable  to  pro- 
duction, and  while  the  justice  of  allowing  a  return 
therefor  is  primarily  a  question  of  ethics,  it  may 
here  be  remarked  that  it  would  be  a  strange  code 

1  See  infra. 


268  THEORY  OF  ECONOMICS 

of  ethics  that  would  deny  to  the  possessor  of  enter- 
prise the  right  to  a  return  for  its  services.  Whether 
profits  can  be  increased  at  the  expense  of  wages  or 
of  any  other  share  depends  upon  whether  the  pos- 
sessors of  enterprise  can  obtain  such  a  control  over 
its  supply  as,  through  the  influence  of  monopoliza- 
tion, to  secure  some  of  product  that  would  other- 
wise go  as  wages  or  as  some  other  share. 

120.  In  judging  of  profits  and  of  their  relation  to 
total  product  in  any  given  case,  account  must  be 
taken  of  the  method  employed  to  estimate  profits. 
In  this  connection  it  is  necessary  to  distinguish 
between  the  rate  of  profits  reckoned  as  a  percentage 
of  the  value  of  the  investment,  the  rate  reckoned  as 
a  percentage  of  the  price  of  a  single  commodity  and 
profits  as  the  portion  of  the  total  output  of  a  given 
industrial  operation  that  goes  to  the  possessor  of 
enterprise.  In  business  transactions  the  first  two 
methods  are  most  commonly  employed.  Thus,  if 
an  industry  with  an  investment  of  $100,000  yields 
$10,000  profits,  the  share  is  said  to  be  10%.  This 
estimate  is  useful  for  comparing  the  returns  to  enter- 
prise in  diiferent  industries  or  in  the  same  in- 
dustry at  different  times,  but  it  does  not  enable  one 
to  judge  of  the  relation  of  profits  to  the  other 
shares,  nor  of  the  sufficiency  of  profits  in  relation  to 
economic  efficiency.  To  decide  these  questions  it  is 
necessary  to  consider  the  character  of  the  industry, 
and  the  amounts  that  go  as  returns  for  the  other 
factors.  The  element  of  time  also  must  be  taken  into 
account.  The  opinion  as  to  the  adequency  of  the 


PROFITS  269 

profits  in  the  illustration  given,  will  vary  materially 
according  as  the  sum  received  represents  the  returns 
accruing  in  a  month,  a  year  or  ten  years.  If  the 
$10,000  represents  a  month's  return,  it  will  be  con- 
sidered high;  if  it  represents  a  year's  income,  it 
will  be  considered  good  or  fair  according  to  the 
nature  of  the  business;  but  if  it  represents  the  re- 
turn for  ten  years,  it  will  probably  be  considered 
insufficient  to  warrant  the  continuance  of  the  busi- 
ness, unless  this  is  necessary  to  save  the  invest- 
ment. Again,  if  a  commodity  that  sells  for  $1.00 
returns  a  profit  of  50  cents,  the  rate,  100%,  seems 
to  be  very  high.  If,  however,  the  sale  of  one  such 
commodity  took  all  the  service  of  one  man's  enter- 
prise for  a  day,  such  profits  would  not  attract  a 
very  high  order  of  enterprise. 

Moreover,  in  estimating  the  total  outlay  that 
society  makes  to  secure  the  enterprise  requisite  for 
the  economic  process  and  in  comparing  this  with 
the  remuneration  for  the  services  of  the  other  fac- 
tors, too  much  stress  should  not  be  laid  upon  the 
large  amount  of  profits  that  may  be  received  in 
individual  instances.  Business  under  modern  eco- 
nomic conditions  is  highly  speculative,  and  the  loss 
in  case  of  failure  is  often  very  great.  The  total 
amount  that  goes  to  enterprise  must  be  sufficient  in 
the  long  run  to  insure  against  failure,  else  the 
probability  of  loss  may  outweigh  the  probability  of 
gain  and  society  will  suffer  from  industrial  stagna- 
tion. Without  attempting  to  decide  here  the  ques- 
tion as  to  whether  profits  are  excessive,  it  may 


270  THEORY  OF  ECONOMICS 

confidently  be  affirmed  that  much  of  the  belief  that 
such  is  the  case,  arises  from  ignorance  as  to  the 
extent  to  which  failure  and  loss  attend  the  attempt 
to  launch  business  undertakings.  Success  is  her- 
alded, while,  so  far  as  possible,  failure  is  concealed. 
The  correct  basis  for  deciding  as  to  whether 
society,  under  the  prevailing  system  of  distribution, 
is  compelled  to  pay  too  much  for  the  services  of 
enterprise,  is  neither  the  absolute  nor  the  relative 
incomes  of  its  members,  but  the  relation  between 
what  it  secures  from  enterprise  and  what  it  pays 
for  it.  If  an  equally  efficient  enterprise  can  be 
secured  at  a  lower  price,  too  much  is  being  paid  for 
the  services  of  this  factor  under  present  conditions; 
if,  however,  a  decrease  in  profits  would  result  in 
lessening  the  efficiency  of  enterprise,  then  the  pres- 
ent payment  therefor  is  not  excessive,  however 
large  may  be  the  amount  received  by  those  who 
supply  the  service. 


WAGES 


121.  Wages  are  the  return  for  the  services  of 
labor.  The  principles  of  distribution  as  applied  to 
wages  may  be  thus  stated  : — Wages  depend  primarily 
upon  the  value  of  the  services  of  labor;  the  value 
of  the  services  of  labor  depends  upon  the  relation 
of  the  supply  thereof  to  the  demand  therefor.  The 
amount  of  wages  received  in  any  given  case  is  de- 
termined by  the  competitive  and  monopolistic  con- 
ditions prevailing  in  connection  with  the  sale  of  the 
services  of  labor.  The  normal  downward  limit  to 
wages  is  the  smallest  amount  that  will  induce  men 
to  work,  for  if  through  the  influence  of  competition 

Walker,  Political  Economy,  Pt.  IV.,  chapters  v.,  vi.;  Gide, 
Political  Economy,  trans.,  Bk.  IV.,  Pt.  II.,  chapter  iii.; 
Taussig,  Wages  and  Capital;  Clark,  The  Philosophy  of 
Wealth,  chapter  viii.;  The  Distribution  of  Wealth  (see  in- 
dex); Laughlin,  Elements  of  Political  Economy,  chapters 
xviii.-xxi.;  Ely,  Outlines  of  Economics,  Bk.  II.,  Pt.  III., 
chapter  iii.;  Pantaleoni,  Pure  Economics,  trans.,  Pt.  III., 
chapter  v. ;  Roscher,  Political  Economy,  trans.,  Bk.  III., 
chapter  iii.;  Sidgwick,  Principles  of  Political  Economy,  Bk. 
II.,  chapters  viii.,  ix.;  Marshall,  Principles  of  Economics, 
Bk.  VI. ,  chapters  ii.-v. ;  Mill,  Principles  of  Political  Economy, 
Bk.  II.,  chapters  xi.-xiv. 

271 


272  THEORY  OF  ECONOMICS 

among  laborers,  wages  fall  below  this  point,  men 
remain  idle  and  the  decrease  in  the  available  supply 
of  labor  tends  to  check  the  fall  in  wages.  The 
normal  upward  limit  of  wages  is  the  difference  be- 
tween the  total  product  and  the  minimum  shares  of 
rent,  interest  and  profits,  for  if  through  monopoli- 
zation by  laborers,  wages  increase  so  as  to  en- 
croach upon  the  minimum  limits  of  some  of  the 
other  shares,  there  will  follow  a  decrease  in  the 
available  supply  of  the  factors  involved.  This  will 
lead  either  to  an  increase  in  the  shares  that  have 
fallen  below  the  minimum  or  to  an  impairment  of 
the  efficiency  of  production,  a  condition  that  in 
itself  will  tend  to  diminish  wages  by  decreasing  the 
amount  of  wealth  available  for  distribution. 

122.  In  actual  business,  labor  is  never  active  with- 
out some  degree  of  enterprise,  for  it  requires  some 
enterprise  to  put  into  operation  any  undertaking, 
even  that  of  utilizing  one' s  labor-power  for  produc- 
tion. This  is  true  of  the  simplest  forms  of  activity, 
such,  for  example,  as  where  the  process  of  want- 
satisfaction  requires  only  the  appropriation  of  fruits, 
water  or  fuel,  which  exist  in  such  abundance  that 
they  may  be  had  for  the  taking.  From  this  it  fol- 
lows that  a  pure  economic  wage,  i.  e. ,  a  return  for 
the  services  of  labor  wholly  distinct  from  the  other 
shares,  exists  only  where  the  value  of  the  services 
of  the  enterprise  involved  amounts  to  nothing. 
Such  a  condition,  absolutely  speaking,  does  not  ex- 
ist. But  for  business  purposes,  the  value  of  the 
services  performed  by  enterprise  in  any  given  case 


UNIVERSITY 
OF 

[FOR  lilt* 
WAGES  273 

may  be  so  small  as  to  be  ignored  in  actual  trans- 
actions, just  as  the  carpenter  ignores  the  indefinitely 
small  differences  in  length,  which  are,  at  the  same 
time,  important  in  the  effort  to  discover  the  funda- 
mental principles  upon  which  the  carpenter  bases 
his  acts.  Commercial  wages,  then,  differ  from  eco- 
nomic wages  in  that  the  former  contain  at  least  a 
modicum  of  profits.  This  fact,  however,  does  not 
prevent  the  recognition  of  the  principles  which 
govern  economic  wages,  principles  that  regulate 
also  the  wages  in  actual  business. 

Moreover,  in  seeking  the  principles  according  to 
which  wages  are  determined,  a  distinction  must  be 
recognized  between  the  total  amount  of  wages  ac- 
cruing in  a  given  undertaking  and  the  rate  of  wages 
for  individual  laborers.  The  former  refers  to  the 
total  amount  of  product  that  goes  to  pay  for  the 
services  of  labor  as  compared  with  the  amount  that 
goes  to  pay  for  the  services  of  the  other  factors, 
situation,  capital  and  enterprise  ;  while  the  rate  of 
wages  refers  to  the  proportion  of  total  wages  re- 
ceived by  individual  laborers.  The  two  questions 
are  intimately  connected,  but  they  are  by  no  means 
identical.  Differences  in  rates  of  wages  to  in- 
dividual laborers  do  not  indicate  differences  in  the 
proportion  of  total  product  which  constitutes  wages. 
If,  in  an  industry  which  requires  10  laborers,  each 
receives  $2.00,  while  in  another  having  an  equal 
output,  20  laborers  are  required,  each  of  whom  re- 
ceives but  $1.00,  the  proportion  of  total  product 
which  constitutes  wages  is  the  same  in  both. 


274  THEORY  OF  ECONOMICS 

123.  A  characteristic  of  labor  that  is  of  much 
importance  in  determining  wages  is  the  insep- 
arability of  the  owner  of  the  factor  and  the 
factor  itself.  Labor  is  inseparable  from  the  person 
of  the  laborer  ;  where  the  one  is,  the  other  must  be 
also.  The  owner  of  situation  may  be  in  one  place 
and  his  property  in  another.  The  same  is  true  of 
the  owner  of  capital  and  his  capital.  Even  the 
possessor  of  enterprise  is  not  so  bound  to  the  scene 
of  the  industry  to  which  he  contributes  as  is  the 
laborer,  for  the  former  may  reside  in  one  place  while 
his  ventures  are  in  other  localities,  whereas  the 
laborer  must  be  where  he  labors. 

The  significance  of  this  difference  between  labor 
and  the  other  factors  lies,  not  in  the  fact  that  dif- 
ferent laws  regulate  the  returns  for  the  factors,  but 
in  the  fact  that  different  conditions  attend  the 
operation  of  the  law.  All  shares  are  subject  to  the 
law  of  value,  but  the  conditions  under  which  com- 
petition and  monopolization  operate  to  determine 
the  relation  of  supply  and  demand  are  materially 
modified  in  the  case  of  labor,  by  the  fact  that  the 
person  of  the  laborer  and  his  labor  power  are  in- 
separable. The  results  of  this  appear  in  various 
forms,1  but  they  may  all  be  summed  up  in  the  state- 
ment that  this  peculiarity  of  labor  decreases  the 
laborer's  power  of  control  in  the  sale  of  his  services 
because  it  limits  the  alternatives  at  his  command. 
He  who  possesses  only  labor-power  must  sell  his 

1  Brentano,  Relation  of  Labor  to  the  Law  of  To-day, 
trans,  by  Porter  Sherman,  pp.  169,  et  seq. 


WAGES  275 

services  at  some  price  or  starve.  The  owner  of 
capital  often  has  the  alternative  of  consuming  his 
wealth  in  the  immediate  satisfaction  of  his  wants, 
if  the  terms  of  a  proposed  exchange  are  not  satis- 
factory. The  owners  of  situation,  capital  and 
enterprise,  if  able-bodied  men,  may  avail  them- 
selves also  of  the  labor-power'  which  their  own 
strength  and  intelligence  give,  while  he  who  is  only 
a  laborer  controls  but  one  of  the  factors  of  pro- 
duction. 

When  to  the  inseparability  of  the  person  of  the 
laborer  and  his  labor,  is  added  the  possibility  of 
rapid  increase  in  population,  which  is  not  regulated 
by  its  relation  to  the  demand  for  labor  but  depends 
upon  other  considerations,  it  is  evident  that  the  con- 
ditions attending  the  sale  of  the  services  of  labor 
are  favorable  to  a  high  degree  of  competition 
among  laborers.  Indeed,  to  such  an  extent  does 
competition  affect  the  sale  of  labor  that,  when  in- 
dividual laborers  are  left  to  their  own  efforts,  wages 
tend  to  the  minimum,  which,  in  the  case  of  this 
share,  may  be  no  more  than  will  maintain  the  effi- 
ciency of  labor,  for  this  often  suffices  to  induce  the 
laborer  to  make  his  services  available.  Indeed, 
since  the  laborer  must  either  sell  his  services  or 
starve,  the  smallest  amount  that  will  induce  him  to 
work  may  be  below  this  normal  minimum.  It  may 
be  the  bare  cost  of  maintaining  life.  For,  though 
it  is  true  that  in  the  long  run  the  injuries  to  pro- 
duction through  decrease  in  the  efficiency  of  labor 
tend  to  prevent  the  permanence  of  such  a  low 


276  THEORY  OF  ECONOMICS 

wage,  the  fact  that  the  immediate  purchasers  of 
the  services  of  labor  may  not  at  once  feel  the  dis- 
astrous effects  of  such  a  reduction,  makes  it  possible 
and  even  probable  that  wages  will  at  times  go  below 
the  normal  minimum.  The  consequences  of  this  are 
serious.  To  impair  the  efficiency  of  the  laborer  is 
to  limit  the  satisfaction  of  his  wants,  and  this  in- 
volves not  only  an  injury  to  the  process  of  pro- 
duction, but  also  an  actual  defeat  of  the  economic 
process  itself,  for  the  interests  of  the  laborers  who 
suffer  are  the  interests  of  society. 

The  possibility  of  excessive  competition  among 
laborers  and  its  injurious  results  give  to  the  labor 
problem  a  deserved  preeminence  among  social  prob- 
lems, and  emphasize  the  importance  of  a  clear 
understanding  of  the  principles  that  regulate  wages 
as  regards  both  the  total  amount  of  wages  and  the 
share  of  each  laborer. 

124.  Wages  depend,  first  of  all,  in  common  with 
the  other  shares,  upon  the  amount  produced,  i.  e., 
upon  the  efficiency  of  production.  This  follows  as 
a  matter  of  course  from  the  fact  that  the  more  there 
is  produced,  the  more  there  is  to  divide.  This  does 
not,  however,  signify  that  the  larger  the  product, 
the  larger  is  the  share  that  the  laborer  will  receive, 
for  whether  the  laborer  gains  by  an  increase  in 
product  depends  upon  whether  he  can  so  far  avail 
himself  of  the  influence  of  monopolization  as  to 
secure  a  portion  of  that  increase.  This  requires 
the  more  emphasis  in  view  of  a  belief,  current 
among  some,  that  if  the  increase  in  product  has 


WAGES  277 

been  due  to  the  application  of  more  laborers  or  of 
more  efficient  labor  to  the  process  of  production, 
the  increase  in  product  must,  under  normal  con- 
ditions, go  to  the  wage  fund,  while  if  the  increase 
in  product  is  not  due  to  labor,  it  cannot  affect  the 
wage  fund.  This  is  commonly  called  the  "residual 
claimant"  theory  of  wages.  It  assumes  that  rent  is 
determined  according  to  the  Ricardian  doctrine ;  that 
interest  depends  upon  the  law  of  supply  and  demand, 
which  must  give  for  the  services  of  capital  a  re- 
muneration "high  enough  to  induce  those  who  have 
produced  wealth  to  save  it  and  store  it  up,  in  the 
place  of  consuming  it  immediately  for  the  gratifica- 
tion of  personal  appetite  or  tastes ;"  and  that  profits 
are  determined  in  the  same  manner  as  rent.1  From 
these,  the  conclusion  is  drawn  that  rent,  interest  and 
profits  are  normally  determined  by  conditions  en- 
tirely independent  of  those  that  determine  wages, 
so  that  these  shares  cannot,  under  the  conditions 
assumed  as  normal,  interfere  with  the  laborer's 
share.  And  it  is  affirmed  that  in  "so  far  as,  by  their 
energy  in  work,  their  economy  in  the  use  of  ma- 
terials, or  their  care  in  dealing  with  the  finished 
product,  the  value  of  that  product  is  increased,  that 
increase  goes  to  them  (the  laborers)  by  purely 
natural  laws,  provided  only  competition  be  full  and 
free.  Every  invention  in  mechanics,  every  dis- 
covery in  the  chemical  art,  no  matter  by  whom 
made,  inures  directly  and  immediately  to  their  bene- 

1  Walker,  Political  Economy,  p.  249. 


278  THEORY  OF  ECONOMICS, 

fit,  except  so  far  as  limited  monopoly  may  be  cre- 
ated by  law  for  the  encouragement  of  invention  and 
discovery." 

'  'Unless  by  their  own  neglect  of  their  own  interests, 
or  through  inequitable  laws,  or  social  customs  having 
the  force  of  law,  no  other  party  can  enter  to  make 
any  claim  on  the  product  of  industry,1  nor  can  any 
one  of  the  three  parties  already  indicated  (the 
recipients  of  rent,  interest,  and  profits)  carry  away 
anything  in  excess  of  its  normal  share. ' ' 2 

125.  This  theory  cannot  stand  the  test  either  of 
experience  or  of  a  scientific  analysis  of  the  economic 
process.  Even  according  to  the  assumption  as  to 
the  principles  determining  the  other  shares,  upon 
which  the  theory  rests,  wages  are  not  independent 
of  those  shares.  One  will  not  undertake  the  risk 
of  cultivating  land  when  he  can  secure  more  as  a 
laborer.3  Hence,  when  wages  are  low  a  less  pro- 
ductive land  will  be  cultivated  than  when  wages  are 
high.  Instead  then  of  rent,  even  according  to  the 
Ricardian  doctrine,  being  independent  of  wages, 
an  assumed  wage-rate  is  essential  to  determine  the 
starting-point  of  rent. 

1  Exception  is  made  of  the  state  and  the  speculator. 

2  Walker,  Political  Economy,  p.  251. 

3  The  satisfaction  derived  from  the  comparative  independ- 
ence that  attends  the  cultivation  of  one's  own  farm  and  the 
influence  of  the  hope  of  gain  from  the  increase  in  value  of 
one's  property  are,  of  course,  part  of  the  inducement  to  own 
and  cultivate  land,  which  must  be  considered  to  offset  some 
of  the  return  that  could  be  secured  from  employment  as  a 
laborer. 


WAGES  279 

Again,  the  rate  of  interest  is  conceived  to  be 
such  as  will  induce  men  to  save  for  the  building  of 
a  fund  of  capital,  and  it  is  determined  by  the  rela- 
tion of  the  supply  of  capital  to  the  demand  there- 
for. But  the  character  of  the  inducement  to  save 
and,  therefore,  the  amount  that  will  be  saved,  /.  e., 
the  supply  of  capital,  depend  in  part  upon  the  op- 
portunity for  profitable  investment.  This  is  in- 
fluenced by  the  possible  profits  and  these,  in  turn, 
by  the  expenses  of  production,  including  wages. 

So,  also,  the  no-profit  class,  as  conceived  by  this 
theory,  depends,  at  any  given  time,  upon  the  stand- 
ard of  wages,  for  men  will  work  for  wages  instead 
of  assuming  the  responsibility  of  an  employer,  un- 
less the  prospective  reward  as  an  employer  is  larger 
than  the  prospective  reward  as  a  laborer.  So  the 
standard  of  wages  is  an  element  in  determining 
profits,  even  according  to  the  rent  theory  of  profits. 
Indeed,  upon  this  point,  the  relation  of  wages  to 
profits  is  not  a  matter  of  inference,  but  is  explicitly 
set  forth  in  the  exposition  of  the  theory.  It  is  ex- 
pressly stated  that  the  " no-profits"  employer  is  one 
whose  return  is  so  small  as  to  be  "practically  equal 
to  what  he  would  receive  if  employed  by  others. ' ' 
As  a  matter  of  fact,  no  share  is  determined  inde- 
pendently of  the  others,  for  each  influences  the 
supply  of  and  the  demand  for  the  services  of  the 
several  factors,  and  affects,  therefore,  the  returns 
for  those  services. 

Fundamental  also  to  the  theory  that  under 
normal  conditions  the  laborer  receives  the  increase  in 


280  THEORY  OF  ECONOMICS 

product  which  results  from  his  increased  efficiency, 
is  the  assumption  that  ' 'competion  is  full  and  free." 
When  this  assumption  is  analyzed  it  will  be  found 
to  involve  all  that  the  theory  seeks  to  prove. 
The  condition  of  competition  upon  which  this 
theory  of  wages  rests  assumes  (1)  that  competition 
among  employers  is  free  to  the  extent  that  if  one 
employer  will  not  pay  the  laborer  the  increase  in 
product  which  follows  his  participation  in  the  busi- 
ness, another  employer  is  at  hand  who  will  do  so, 
and  (2)  that  competition  among  laborers  is  such 
that  if  one  laborer  is  not  willing  to  work  for  the 
amount  of  product  which  follows  his  participation 
in  industry,  another  one  can  be  found,  who  will. 
In  other  words,  the  laborer  receives  the  increase  in 
product  which  follows  his  participation  in  a  pro- 
ductive operation  because,  by  hypothesis,  conditions 
are  such  that  he  can  obtain  it;  he  receives  no  more 
than  this  amount,  because,  by  hypothesis,  conditions 
exist  which  prevent  him  from  doing  so. 

Moreover,  under  the  conditions  assumed,  that 
which  professes  to  be  "full  and  free"  competition, 
is  in  fact  not  such.  The  amount  received  by  the 
laborers  equals  what  is  added  to  product  by  their 
participation  in  the  industry,  only  because  the 
laborers  are  not  free  to  compete  beyond  the  point 
where  they  receive  this  amount,  and  because  the 
employers  also  are  not  free  to  compete  beyond  that 
point.  In  other  words,  the  theory  prescribes  very 
definite  limits  within  which  competition  is  free. 
Beyond  these  limits,  it  ceases  to  be  free. 


WAGES  281 

It  is  significant  that  in  the  theory  as  presented, 
no  attempt  is  made  to  show  how  such  a  state  of 
competiton  as  is  assumed,  can  be  realized.  Were 
the  analysis  carried  further,  it  would  be  found  that 
the  condition  of  competition  assumed,  is  possible 
of  realization  only  when  the  influence  of  monopo- 
lization suffices  to  withstand  the  further  operation 
of  competition,  both  among  laborers  and  employers, 
at  the  point  where  the  laborers  receive  the  portion 
of  product  which  results  from  their  participation  in 
the  industry.  Except  for  the  counteracting  in- 
fluence of  monopolization  by  the  laborers,  they  could 
not  withstand  a  decrease  in  wages  below  the  amount 
mentioned;  and,  on  the  other  hand,  but  for  the  in- 
fluence of  monopolization,  working  in  the  interest 
of  the  employers,  the  laborers  could  and  would  use 
the  same  power  of  control  which  enabled  them  to 
bring  wages  up  to  this  point,  to  force  them  still 
higher. 

126.  Though  at  any  given  time,  there  is  a  certain 
amount  of  product  which  actually  goes  to  constitute 
wages,  it  is  not  to  be  inferred  that  this  is  a  prede- 
termined amount,  so  fixed  and  destined  to  pay 
labor  that  the  share  of  the  individual  laborer  is 
bound  to  decrease  as  the  number  of  laborers  in- 
creases, or  to  increase  as  the  number  of  laborers 
decreases,  with  the  result  that  an  increase  in  the 
share  of  any  one  laborer  involves  a  decrease  in  the 
share  of  some  other  laborer,  and  vice  versa.  This 
view,  which  is  essentially  that  of  the  so-called 
"wage  fund  theory,"  has  had  wide  acceptance. 


282  THEORY  OF  ECONOMICS 

It  finds  some  apparent  support  from  the  fact  that 
the  amount  of  wages  is  influenced  by  total  product 
and  that  the  rate  of  wages  is  usually  determined  in 
advance  of  production,  and,  indeed,  that  wages  are 
often  paid  before  the  product  is  disposed  of. 

The  theory  involves  the  mistaken  idea  that,  of 
the  existing  product,  the  amount  which  can  consti- 
tute wages  is  fixed,  and  that  wages  are  independent 
of  future  product.  Whereas,  of  the  existing  fund 
of  wealth,  the  amount  that  may  constitute  wages 
is  variable.  If  the  existing  product  more  than 
suffices  to  meet  the  minimum  limits  of  the  several 
shares,  it  is  possible  that  some  of  the  excess  will 
be  paid  to  the  laborers.  Furthermore,  in  so 
far  as  the  exigencies  of  the  laborers  do  not 
necessitate  the  immediate  use  of  their  share, 
the  amount  to  be  paid  to  them  may  wait  for  future 
product  and  be  influenced  thereby.  The  prospect 
of  large  returns  to  an  industry  may  and  often  does 
result  in  an  increase  of  wages. 

On  the  other  hand,  since  the  demand  for 
labor  is  influenced  by  prospective  production, 
while  wages  are  usually  paid  after  work  is  done, 
and  even  where  an  employer  advances  wages,  he 
expects  to  reimburse  himself  out  of  product  for 
such  advances,  it  is  sometimes  held  that  wages  de- 
pend entirely  upon  and  are  paid  entirely  out  of  fu- 
ture product. 

Ultimately,  it  is  true,  the  amount  of  product  must 
at  least  replace  that  which  is  expended  in  produc- 
tion, or  economic  progress  will  cease,  but  it  does 


WAGES  283 

not  follow  that  wages  are  paid  entirely  out  of  or 
depend  entirely  upon  future  product.  To  the 
extent  that  the  laborer,  during  the  process 
of  production,  consumes  existing  wealth,  he  re- 
ceives his  wages  from  existing  product,  and  but 
for  that  product  and  the  wages  so  paid,  there  would 
be  no  future  product.  To  the  extent,  also,  that  the 
existing  supply  of  commodities  determines  the 
prices  of  those  which  the  laborer  purchases,  the 
amount  of  real  wages  depends  upon  existing  prod- 
uct. In  general,  it  may  be  said  that  the  relation  of 
past  and  future  product  to  wages  depends  wholly 
upon  the  extent  to  which  they  influence  the  sup- 
ply of  and  the  demand  for  the  services  of  labor. 

127.  With  respect  to  the  relation  between  the 
variations  in  the  wages  of  different  laborers,  it  is 
alike  erroneous  to  say,  on  the  one  hand,  that  an  in- 
crease or  decrease  in  the  wages  of  one  necessarily 
involves  an  opposite  movement  in  the  wages  of  an- 
other ;  or,  on  the  other  hand,  that  a  movement  in 
the  wages  of  one  cannot  affect  the  wages  of  another. 
Owners  of  the  different  factors  compete  with  each 
other  for  a  share  of  total  product;  and  within  each 
class,  the  members  thereof  compete  with  each  other 
for  a  portion  of  the  share  which  goes  to  that  class. 
The  former  affects  the  total  amounts  which  go  as 
rent,  interest,  profits  and  wages ;  the  latter  affects 
the  amount  which  accrues  to  each  individual  in  a 
class.  The  total  wage  fund  depends  upon  the 
amount  of  total  product  that  labor  can  secure.  An 
increase  in  the  total  wage  fund  which  results  in  in- 


284  THEORY  OF  ECONOMICS 

creased  efficiency  of  labor,  may  so  increase  product 
as  not  to  decrease  any  share.  But  where  an  increase 
in  the  wage  fund  is  due  to  increased  monopoliza- 
tion by  laborers,  without  an  accompanying  increase 
in  product,  there  follows  a  decrease  in  one  or  more 
of  the  other  funds. 

Again,  where  an  increase  in  the  wages  of  some 
laborers  occurs  as  a  result  of  an  increase  in  the 
wage  fund,  no  other  laborer  suffers  a  decrease. 
But  should  the  wages  of  any  increase  without  a 
corresponding  increase  in  the  wage  fund,  the  gain 
to  those  receiving  this  benefit  would  be  at  the  ex- 
pense of  fellow  laborers.  Any  one  of  these  alterna- 
tives is  a  possibility  in  the  distribution  of  product. 

128.  As  has  been  seen,  the  use  of  a  standard  unit 
with  which  to  measure  values  in  the  process  of  ex- 
change, introduces  complications  into  the  determin- 
ation of  the  several  shares,  because  of  its  possible 
effect  upon  prices.  Variations  in  the  value  of  that 
standard  result  in  variations  in  prices,  and  where 
the  prices  of  some  commodities  respond  more  readily 
to  changes  in  the  value  of  that  standard  than  do 
others,  the  relative  status  of  the  members  of  so- 
ciety is  disturbed.  In  this  connection  it  is  neccessary 
to  recall  the  distinction  made1  between  the  nominal 
shares  and  the  real  shares.  Nominal  wages  are  the 
amount  received  by  the  laborer  in  the  medium  of 
exchange ;  while  real  wages  depend  upon  the  nomi- 
nal return  to  the  laborer  and  the  purchasing  power 
of  that  return.  Thus,  if  one  of  two  masons  receives 

'  See  §  101. 


WAGES  285 

$5.00  a  day  and  the  other  $2.50  a  day,  the  nominal 
wages  of  the  former  are  twice  as  high  as  those  of  the 
latter,  but  if  the  former  is  obliged  to  pay  twice  as 
much  as  the  latter  for  the  same  grade  of  commodi- 
ties, the  real  wages  of  the  two  are  equal.  So  far  as 
labor  is  concerned,  an  increase  in  the  prices  of  gen- 
eral commodities  is  a  decrease  in  real  wages,  unless 
accompanied  by  a  corresponding  increase  in  nominal 
wages;  and  a  decrease  in  the  prices  of  general  com- 
modities, unaccompanied  by  a  corresponding  move- 
ment in  nominal  wages,  is  an  increase  in  real  wages. 
To  the  extent  that  wages  are  matters  of  contract 
or  custom  they  change  more  slowly  than  do  the 
prices  of  general  commodities,  hence  an  increase  in 
the  prices  of  general  commodities  involves  at  least  a 
temporary  loss  to  the  wage  earner,  and  a  decrease 
in  the  prices  of  commodities,  a  temporary  gain. 
These  results  tend  to  be  offset  in  a  measure,  by  an 
increased  demand  for  labor  when  prices  of  general 
commodities  rise,  and  a  decreased  demand  for 
labor  when  prices  fall.  But  in  the  absence  of 
combinations  for  mutual  assistance,  laborers  are 
specially  susceptible  to  the  influence  of  com- 
petition, a  fact  that  renders  labor  more  liable 
to  loss  from  an  increase  in  the  prices  of  gen- 
eral commodities  than  to  gain  from  a  decrease  in 
such  prices.  However,  the  extensive  organization 
of  labor  in  modern  industry  materially  lessens  this 
tendency  of  the  laborer  to  lose  as  a  result  of  varia- 
tions in  the  prices  of  general  commodities,  for  it  in- 
sures a  more  prompt  increase  in  nominal  wages 
when  prices  of  general  commodities  rise. 


OF 

IFOH^ 


INDEX. 


(References  to  pages.) 


Activity,    economic,    4,    54,    56. 

See  also  Incentive  to  activity. 
Administration,  14. 
Advertising,  156. 
Alternatives  in  exchange,    192, 

195. 

Basis  of  distribution,  172. 

Capital,    91,  93,   242,    243,    246, 

248. 

Character,  100. 
Circulating  capital,  93. 
Commercial  interest,  244  ;  rent, 

226  ;   wages,  272. 
Competition,  9,   58,  60,  61,  65, 

194,   196,   201,   202,   214,   217, 

219,  230,  274,  280. 
Contract,  right  to,  136. 
Contribution  to  production  as  a 

basis  of  distribution,  181. 
Copyright,  133. 
Corporate  organization,  141. 
Cost  of  production,  37,  196. 
Credit,  138,  190. 

Demand,  38,  40,  76,  144. 

Development  of  demand,  76, 
144. 

Development  of  wants,  146. 

Diminishing  returns,  law  of,  77, 
79,  80. 

Distribution,  165.  See  also 
Basis  of  distribution,  Ex- 
change, Interest,  P  r  o  fi  t  s  , 
Rent,  Shares,  Wages. 

Division  of  function,  105,  113. 
See  also  Economic  organiza- 
tion. 


Economic  activity,  4,  54,  56. 

Economic  organization,  82,  105, 
165. 

Economic  process,  53. 

Economic  progress,  64. 

Economics,  3. 

Economic  want,  19. 

Effort,  relation  of,  to  develop- 
ment of  wants,  146. 

Enterprise,  98,  99,  257,  260,  272. 

Equality  as  a  basis  of  distribu- 
tion, 175. 

Ethics,  11,  14. 

Exchange,  185,  213. 

Expansibility  of  wants,  151. 

Factors  of  production,  81,  86. 
Faith,   relation  of,   to   activity, 

127. 

Finance,  14. 
Fixed  capital,  93. 
Free  competition,  61. 
Fundamental  concepts,  18. 
Fund  to  be  distributed,  210. 

General  wants,  19,  28. 

Habit,  150. 

Healthfulness  of  wants,  154. 

Heredity,  95. 

History,  14. 

Incentive  to  activity,  82,  125. 

Increasing  returns,  law  of,  78, 

80. 
Interest,    242,    279.       See    also 

Shares  in  distribution. 

Jurisprudence,  14. 


287 


288 


INDEX 


Labor,  86,  94,  95,  271,  274,  276. 

Land,  87,  181. 

Law  of  diminishing  returns,  77, 

79,  80. 
Law  of  increasing  returns,    78, 

80. 

Law  of  price,  201. 
Law  of  value,  36,  42. 
Limited  liability,  140,  141,  142. 
Limits  to  property  rights,  133. 
Limits  to  the  right  to  contract, 

139. 

Malthus  on  population,  145. 

Material,  89.     See  also  Capital. 

Maximum  limit  to  price  varia- 
tions, 200,  201. 

Maximum  limits  to  shares  in 
distribution,  216,  223,  225, 
243,  250,  258,  272. 

Measuring,  process  of,  30. 

Measuring  value,  32. 

Medium  of  exchange,  188,  206, 
220,  284.  See  also  Money. 

Minimum  limit  to  price  varia- 
tions, 196,  201. 

Minimum  limits  to  shares  in 
distribution,  216,  223,  224,  231, 
243,  249,  258,  261,  271,  275. 

Mobility  of  capital,  246,  248. 

Money,  24,  245,  251.  See  also 
Medium  of  exchange. 

Monopolization,  60,  62,  66,  80, 
198,  200,  202,  203,  214,  217, 
219,  229,  260,  281. 

Moral  character,  100. 

Need  of  a  basis  of  distribution, 
176. 

No-rent  situation,  231. 

Normal  economic  activity,    56. 

Normal  limits  to  price  varia- 
tions, 196,  200,  201. 

Normal  limits  to  shares  in  dis- 
tribution, 216. 

Nourishment,  96. 


Old  Age  Pensions,  142. 
Organization,  economic,  82. 
Overproduction,  122. 

Patent  rights,  132. 

Persistence  of  wants,  149. 

Physical  wants,  152,  155. 

Politics,  14. 

Population,  79,  83,  144,  145. 

Power-iii-exchange,  26. 

Power  of  want-attraction,  20, 
21,  23,  26,  32,  36.  See  also 
Value. 

Price,  29,  44,  191-208,  238,  266, 
284. 

Principles  of  distribution,  222, 
224,  242,  257,  271. 

Production,  73.  See  also  De- 
velopment of  demand,  Econ- 
omic organization,  Factors  of 
production,  Incentive  to  ac- 
tivity. 

Profits,  257,  279.  See  also  Shares 
in  distribution. 

Property  rights,  129-136. 

Purpose  of  economic  science,  5. 

Relation  of  economics  to  other 

subjects,  14. 
Religious  faith,  127. 
Rent,  224,  278.    See  also  Shares 

in  distribution. 

Rent  theory  of  profits,  262,  264. 
Residual    claimant    theory    of 

wages,  276,  278. 
Ricardian  doctrine  of  rent,  232, 

235. 
Rights,  127. 

Scientific  character  of  econom- 
ics, 16. 

Scope  of  economics,  4,  12. 

Shares  in  distribution,  192,  204, 
209.  See  also  Interest,  Profits, 
Rent,  Wages. 

Situation,  86,  87,  225. 

Slavery,  129. 


INDEX 


289 


Socialism,  136. 

Social  sciences,  13. 

Sociology,  14. 

Specialization    of    wants,    156, 

159,  162. 

Specific  wants,  19,  22,  28. 
Speculation,  123. 
Spiritual  wants,  152,  155. 
Standard  of  living,  145. 
Standard  measure  (or  unit)  of 

value,  48,  220,  284. 
Statistics,  15. 
Steps  in  the  economic  process, 

68. 
Supply,  38,  47,  81. 

Trade,  206. 
Training,  97. 


Unearned  increment,  241. 

Unification  of  design,  111,  113. 
See  also  Economic  organiza- 
tion. 

Value,  26,  29,  32,  36. 

Value  of  services  as  a  basis  of 
distribution,  184,  212.  See 
also  Exchange,  Shares  in  dis- 
tribution. 

Wage  fund,  281. 

Wages,  236,  267,  271.     See  also 

Shares  in  distribution. 
Want,  4,    19,    28,    83,    85.     See 

.also  Development  of  demand. 
Want  -  attracting    power.      See 

Power  of  want-attraction. 
Wealth,  20,  21,  23,  24,  73. 
Will,  100. 


BR* 

THE 

UNIVERSIT 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 
BERKELEY 

THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


8Er     T  19?? 
SEP  7  1928 

MAR    27  1945 
S   ? 


LD 

MAR    8  1961 


LD 

MARiO'b4.IoPjy, 


20rw-l,'22 


YR  05758 


w 


